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529 Facts For Financial Literacy Month

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What To Know About Ohio’s 529 Plan During Financial Literacy Month

For the past few years, there has been a renewed call to increase the country’s financial education. With this growing emphasis on money knowledge, April has been designated as Financial Literacy Month.

529 college savings plans is one financial area where there is need for growing awareness. According to the 2019 How America Saves For College Report by Sallie Mae, only 29 percent of families saving for college are using 529 plans.

Ohio’s 529 Plan, CollegeAdvantage, would like to highlight all the benefits of saving for a higher education in a 529 plan as well as answer some of most frequently asked questions.

What is a 529 plan?

Created with Section 529 of the Internal Revenue Code in 1996, the federal government established 529 plans 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. There are several tax benefits to opening a CollegeAdvantage Direct 529 Plan account:

First, all earnings in a 529 plan are tax-free, so all investment growth is yours to spend on higher education costs. To see how tax-free growth can build your 529 account, use the tax benefit tool to see how the funds in a 529 grow compared to a taxable savings account.

Second, 529 plan withdrawals to pay for qualified higher education expenses are tax-free at accredited programs that accept federal financial aid. The qualified cost are the mandatory expenses to attend the program such as tuition; room and board during any academic period in which the 529 beneficiary is enrolled for at least half of the full-time academic workload according to the eligible education institution; mandatory fees; computer equipment and related technology as well as internet services; books, supplies and equipment related to enrollment and class schedule; and certain expenses for a special-needs student.

With the recently signed SECURE ACT component of the Further Consolidated Appropriations Act, certain apprenticeships costs — fees, textbooks, supplies, and equipment, including required trade tools — can now be paid with a 529 plan withdrawal. The apprenticeship program must be registered with the Secretary of Labor’s National Apprenticeships Act in order to use a 529 plan withdrawal. Interested parties can check the Labor Department’s search tool to confirm that a program is eligible.

Additionally, the SECURE Act now allows any student loan that qualifies for the federal student loan income tax deduction to now be paid with a 529 distribution. There is a $10,000 lifetime limit per 529 beneficiary. However, an additional $10,000 can be used to repay qualified student loans for each of the beneficiary’s siblings.

Finally, Ohio offers deductions from taxable state income to Ohio residents who contribute to Ohio’s 529 Plan, up to $4,000 per year, per beneficiary, with unlimited carry forward. Unlimited carry forward means that $4,000 is not an annual contribution cap. As an Ohioan, if you contribute more than $4,000 in one year, you can continue to subtract $4,000 per year, per beneficiary, from your State of Ohio taxable income until all the 529 contributions are deducted.

What if my child doesn’t go to an Ohio school?

A 529 account can be used at any federally accredited institution nationwide. That means that while you are saving in Ohio’s 529 Plan, your child can choose to use those funds at an eligible institution across the U.S. If the school has a Federal School Code on the Free Application for Federal Student Aid (FAFSA), then withdrawals for the qualified higher education expenses at that school will be tax free. 

What if my child doesn’t want to go to a four-year school?

529 plans can be used for whatever school comes after high school – whether for a two-year, four-year, graduate or professional degree, certificate programs, registered apprenticeships programs, or any other post-secondary credential. This list includes community colleges, vocational or trade schools, graduate schools, and even some study-abroad programs.

What if we’re expecting financial aid?

When filling in the FAFSA form, your 529 account is considered an asset. When owned by a parent, the 529 plan funds are assessed at a maximum of 5.64% of its value.

Federal financial aid is typically offered in the form of grants, loans or work-study. With Pell Grants, students do not repay this aid. Work-study programs allow enrolled students to work part-time to earn money for some college costs. Federally subsidized student loans and parental loans must be repaid after college with interest. Make sure you understand what type of aid is being offered to see whether or not you will have to repay it with accrued interest.

Another reason to fill out FAFSA: Organizations — like states, universities, colleges, and private organizations — also use it to determine what institutional scholarships or loans to offer to students interested in attending their school.

What if my child gets a scholarship?

Your Ohio 529 account is still an important component of your college-saving strategy even if your child does earn a scholarship. Very few scholarships cover 100% of the costs. A 529 plan is perfect to pay for the other qualified expenses not covered by the scholarships, such as room and board.

If your child does receive a full-ride scholarship, you can withdrawal the matching amount of the scholarship from your 529 plan. As this is a non-qualified withdrawal, you will have to pay taxes on the earnings portion.

What if my child doesn’t go to college?

You always have access to the money you have saved in a 529 plan. Hold onto to the account to see if your child rethinks the decision for there are no time limits using a 529 account. Let the 529 plan sit and watch the tax-free earnings continue to grow. If not, you can transfer the funds to any member of the family of your beneficiary, including yourself, without any tax consequences. A member of the family is anyone related to the original beneficiary by blood, marriage, or adoption.

You also have the option of withdrawing all the funds from your 529 plan. There will be a 10 percent federal tax penalty as well as taxes assessed on the earnings portion only of the withdrawal.

If you need help determining how much to put aside each month to reach your college savings goal, fill in the College Savings Planner to receive personalized saving estimate. Please note that this is an example for illustrative purposes only. For additional advice, consult with your legal, financial, tax, or other advisor.

For the last 30 years, Ohio’s 529 Plan has provided families across the nation flexible options and educational resources to invest for higher education expenses after high school. Ohio 529 Plan can be used at any four-year college or university, two-year community college, trade or vocational school, certificate program, and registered apprenticeships across the country that has a Federal School Code.

Open your tax-advantaged Ohio’s 529 Plan today at CollegeAdvantage.com. Someday your child is going to college. Someday begins with CollegeAdvantage.com.

Posted on March 26, 2020

Ohio Tuition Trust Authority

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