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When thinking of your child’s future, you understand that a key to starting a successful career is a post-secondary education. Whether it’s a two-year, four-year, graduate, technical, or professional degree, you know it would be best to start saving now to decrease student debt later. As you research tips for how to save for college, you may keep coming across 529 plans and wonder, “What is a 529 plan?”
Ohio's 529 Plan, CollegeAdvantage, was established by Section 529 of the Internal Revenue Code to encourage parents to save their children’s future higher education costs in a tax-advantaged manner. CollegeAdvantage is Ohio’s 529 college savings program. The tax benefits of opening a CollegeAdvantage Direct 529 Plan account are:
- Tax-free earnings
- Tax-free withdrawals
- State of Ohio tax deduction (for residents of Ohio only)
1) Tax-free earnings
All of the money you contribute to a CollegeAdvantage 529 Plan will grow tax-free and you can withdraw all earnings tax-free, provided that the account is used for qualified higher education expenses. To see just how tax-free growth adds up with a 529 savings plan, use the tax benefit tool and immediately see the difference between a 529 plan account in comparison to a taxable account. Unlike a taxable account, a Ohio's 529 Plan ensures that every bit of investment growth is yours to use, tax-free. CollegeAdvantage has additional aids to help you set or adjust your college savings goals. If you’re curious about how much you’ll need to save or you want to double-check your risk tolerance, use these tools to gain better insights and to get questions answered. As you research, always remember that time is your best friend. Over time, every amount contributed, big or small, will help you reach your savings goal.
2) Tax-free withdrawals
Not only does your CollegeAdvantage 529 plan grow tax-free, it also remains tax-free when the withdrawals are used for qualified higher education expenses. These expenses must be for eligible education institutions that have a Federal School Code through the Free Application for Federal Student Aid (FAFSA). The definition of a 529-qualified higher education expense is broad and includes many major costs, including: tuition, room and board costs during any academic period the beneficiary is enrolled at least half-time, computer equipment and related technology and services, mandatory fees, books, supplies, any equipment required for enrollment or attendance, and certain expenses for special-need students.
Some of the costs that are not qualified as higher education expenses include: Transportation costs, insurance, fees and equipment which are not required for enrollment, parking tickets, library fines, and payment for student loans.
To help create even more benefits to opening a college savings account, the U.S. Congress passed the Protecting Americans from Tax Hikes (PATH Act) of 2015. Signed by the president, this law allowed the sole account beneficiary enrolled in college to use their 529 account toward computers, educational software, and related expenses. Entertainment software, including gaming systems, do not qualify.
3) State of Ohio tax deduction
If you are an Ohio taxpayer, contributions to CollegeAdvantage may be deducted from your Ohio taxable income in any amount up to $4,000 per year, per beneficiary, with unlimited carry forward. This means that $4,000 per year is not a contribution cap. Should you choose to contribute more than $4,000 in a calendar year, any amounts above $4,000 may be deducted in future years, in increments up to $4,000 per year, until all contributions have been deducted. If you have an Ohio College Advantage 529 accounts for each of your children, you receive the deduction to your Ohio taxable income for contributions made to each beneficiary’s account. Non-account owners who are Ohio taxpayers qualify for this tax deduction when they give gifts for college directly to CollegeAdvantage accounts.
A bottom line benefit of a 529 plan? It’s far cheaper to save money and earn interest in an account now than pay off students loans with accumulated interest later. With all the tax benefits offered with a 529 plan, your account can grow to reach your college savings goal. If you’ve made it this far and don’t have a CollegeAdvantage account, we have a tool to help you see how just how much it costs to wait to save for college.
Posted on April 24, 2018