Six Simple Steps To Save For College
If you want to save for your children education after high school but aren’t sure where to start, your first step should be researching your best options. Make sure your investigations include tax-free 529 college savings plans.
Step 1: Research 529 plans
Established by the federal government in 1996, 529 plans are the tax-advantaged way to save for whatever education comes after high school for your child. 529 plans can be used at a federally accredited higher education institution — from two-year, four-year, graduate, trade or vocational schools to certificate programs. If the school has a Federal School Code on the Free Application for Federal Student Aid (FAFSA), then the withdrawals to cover qualified higher education expenses at that school will be tax-free. At the end of 2019, the SECURE Act added other qualified expenses for which a tax-free 529 plan withdrawal would cover: fees, textbooks, supplies, and equipment, including required trade tools for apprenticeship programs that have been accredited by the U.S. Department of Labor.
Another advantage is that no matter what state or program’s 529 plan you save in, your 529 account will be accepted at schools nationwide. For example, if you save with Ohio’s 529 Plan, CollegeAdvantage, your child can use the Ohio 529 for any type of degree, at any accredited college, university, or other program in the country.
Step 2: Check out 529 plan’s tax benefits
There are many reasons to save in a tax-free 529 plan, especially when compared to the typical, taxable bank savings account. Your higher education savings grow in a tax-advantaged manner in a 529 plan.
All earnings grow tax-free so all earned income is yours to use to cover qualified college costs without negative tax consequences. This also includes all the compound interest, which is accrued on all contributions, investment options earnings, and the already accumulated interest. The longer a college savings plan has time to grow, the longer compound interest can add to the account. This is an excellent reason to start as 529 fund as early as possible for your child.
In addition, 529 plan withdrawals are tax-free when used qualified higher education expenses, which are those required costs for attendance at a school. These expenses include 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, two new qualified costs have been added to 529 plans: certain apprenticeships costs and payment for any student loan that qualifies for the federal student loan income tax deduction. There is a $10,000 lifetime limit per 529 beneficiary. An additional $10,000 can be used to repay qualified student loans for each of the beneficiary’s siblings.
For Ohio residents with an Ohio 529 account there’s an additional tax advantage. Ohioans can deduct their 529 contributions from their Ohio taxable income, up to $4,000 per year, per beneficiary, with unlimited carry forward, which means that $4,000 per year is not a contribution cap. With unlimited carry forward, an Ohio taxpayer can continue to subtract $4,000 per year, per beneficiary, from their Ohio taxable income until all the 529 contributions have been deducted.
Step 3: Use tools to shape the 529 that’s right for your family
Ohio’s 529 Plan offers tools and calculators to help you shape the college saving account that best fits the needs of your family. Our College Savings Planner can help you determine what dollar amount you would like to set aside to reach your college savings goal. The Cost of Waiting Tool can show how starting early with your higher education savings can really build up, even if it’s small contributions to start. The Tax Benefit Tool illustrates how the tax-free earnings in a 529 plan allows you to keep every dollar that grows in the account, unlike a taxable bank savings account. Lastly, when you’re ready to open an Ohio’s 529 Plan account, take the Risk Tolerance Questionnaire to determine which investment style — conservative, moderate, or aggressive — you would be most comfortable following.
Step 4: Review the investment options
Ohio’s 529 Plan offers ready-made age-based portfolios — Advantaged Age-Based Portfolios (AABP) and the Vanguard Ready-Made Age-Based Portfolios — that reflect college-savings industry standards of smoother glide paths. A glide path determines the asset allocation mix within an investment option.
For an age-based 529 portfolio, the asset allocation mix is created through age bands. When the beneficiary is young, there is more stocks (equity) in the portfolio. Why? Stocks are affected by market volatility; so if there is an economic downturn, there will be more time for the college savings plan to recover. As the beneficiary grows older, the mix adjusts with each new age band, reducing the amount of equity and increasing the amount of more conservative investments such as fixed-income and cash preservation options.
You can also create your own investment portfolio with international equity options, U.S. equity options, balanced options, fixed-income options, capital preservation option, and banking options.
If you would like to learn more about Ohio’s 529 Plan age-based products, here’s an article describing how these investment options work. If you’re wondering what other College Advantage Direct 529 Plan account owners have selected for their portfolios, here is the current top ten list.
Step 5: See how automatic contributions builds up your savings
One of the simplest ways to save is to set up automatic deposits to a 529 college savings account and then forget about it. Many account owners say it’s easiest to have contributions automatically transferred from their checking or savings bank accounts to the 529 account before the funds are unintentionally spent on other expenses. Electronically transferred 529 contributions can be scheduled to match your paycheck deposits or to another monthly contribution schedule. Some employers also offer payroll deduction, where a portion of your paycheck is directly deposited into your 529 account. You can login to your 529 account and establish payroll deduction through direct deposit. You can also complete then mail in a payroll deduction form. One of CollegeAdvantage’s investment option, a Fifth Third Certificate of Deposit (CD), is not available for purchase through automatic recurring contributions or payroll deduction. It must be opened with a minimum $500 contribution.
Small investments can add up to big savings over time through regular automatic contributions or payroll deductions.
Step 6: Open an Ohio 529 Plan account
After doing your research, you’ll find it’s easy to open an Ohio 529 Plan online to save for your child’s future training and education. If you would like an idea of what to expect, here’s an article which will gives step-by-step guidance as you navigate the online sign-up.
You will want to collect some personal information necessary to open the 529 account. Ohio’s 529 Plan has a list of what data will be needed to sign up for an account. One section is about a successor owner, the person you designate to become the 529 account owner in case you become unable to continue in that role. It’s important to have a successor owner to allow for an easy transfer of account ownership and the continuance of the saving strategy you established for your child should something happen to you as account owner.
There is no fee to open an Ohio 529 Plan. The minimum contribution to open your account is $25.
For more than 30 years, Ohio’s 529 Plan, CollegeAdvantage, has helped families across the nation save money for their children’s future higher education costs with tax-advantaged benefits. If you’d like to do more research, explore Ohio’s 529 Plan —The Plan That Can — at CollegeAdvantage.com.
Posted on May 01, 2020