Saving For College During Tough Times
This article was originally published on Fifth Third's blog page on May 19, 2020.
As we come together to find our way through the current COVID-19 troubles, it takes a singular focus to conquer obstacles that lie ahead.
You need stay focused on your goals, too. If one of them is saving for your children’s higher education, you have to look beyond the current challenging financial market to see the future you’re building for them. Saving for higher education takes a forward-looking action plan and it’s best to stay the course you’ve already laid out.
Hopefully, your strategy includes a 529 plan for your higher education savings. In honor of 529 Day (May 29), here’s are some of the many advantages of saving in a 529 plan which will benefit you and your child in the long run.
The advantage of tax benefits
529 plans should be a critical component to your long-term savings strategy. These specialized accounts offer tax benefits to grow your savings even more. These advantages include tax-free earnings, so every dollar accrued is yours to cover college costs, and tax-free withdrawals for qualified higher education expenses. These are the mandatory costs to attend a higher education institution such as tuition; room and board; 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. Apprenticeships costs — fees, textbooks, supplies, and equipment, including required trade tools— can also 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.
There is also a tax benefit for Ohio residents who saves in Ohio’s 529 Plan, CollegeAdvantage, you can deduct up to $4,000 per year, per beneficiary, from your state income taxes for matching contributions to your Ohio 529, 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, in future years you can continue to subtract $4,000 per year, per beneficiary, from your State of Ohio taxable income until all Ohio 529 contributions are deducted.
The advantage of starting early
Another key component for growth in any savings account is time. Time goes hand in hand with compound interest as dynamic drivers in a 529 account. For a 529 college savings plan, the compound interest is accrued not just on the original contribution but every continuing contribution, all the earnings from the 529 investment options, and the already accumulated interest.
The longer you have to save before you need the funds in a 529 account, the longer your savings have a chance to grow with compound interest. That’s why it’s best to start saving as early as possible for a future higher education. Saving early in your child’s life creates a good foundation from which the 529 account can grow for years to come. You can even start a 529 plan before your child is born to have family members and loved ones can give a gift of a higher education to the child’s 529 plan as a baby shower gift.
By saving early, you establish good savings habits that you can carry through to building your emergency fund and retirement. It also shows your child that you believe in them and their amazing future life, which they can obtain through their higher education. Research from the Institute for Higher Education Policy shows that when a child know that there are college savings for them, they know that they are expected to go to college. In fact, children with $1-$499 in college savings are three times more likely to attend college and four times more likely to graduate than those with no savings.
The advantage of automatic contributions
Life will always throw curve balls at you. One way not to get distracted and forget to set aside your savings is to set up automatic contributions. By consistently saving, you can set it, forget it, and move to all the other items on your to-do list. You are also taking advantage of savings strategy called dollar-cost averaging. When you contribute consistently to an investment, you will buy shares both when their prices are higher and when they are lower. During a volatile time like this, your dollars can purchase more shares while the market is down. This process can allow you to end up with more shares of these investments at a reduced cost. When the stock market stabilizes, you will likely have more in your 529 plan that is ready to grow.
The advantage of age-based investment options
For Ohio’s 529 Plan, many families choose to save with age-based investment options. An age-based 529 portfolio creates an asset allocation mix based on age bands. When the beneficiary is young, there are more equities found in the portfolio. As the beneficiary grows older, the mix adjusts to reduce the amount of equity and increase the amount of more conservative investments such as fixed-income options and cash preservation options, which are offered by Fifth Third Bank.
If your family is closer to need the 529 account to cover college costs, an age-based portfolio has transitioned over time to more conservative, cash preservation funds instead of equities. This can help minimize the impact of market volatility on the bottom line of the 529 account. If your beneficiary is young, while age-based options do contain more equities, your account will have time to rebound as markets recover.
The advantage of saving here but using your 529 plan anywhere
529 plans can be used nationwide at traditional four-year colleges or universities, as well as two-year community colleges, trade or vocational schools, and certificate programs. Your child can attend any higher education institution nationwide that accepts federal financial aid. The quickest way to confirm this is to see if the school has a Federal School Code on the Free Application for Federal Student Aid (FAFSA). Also, with the passage of SECURE Act at the end of 2019, 529s can now be used to pay for certain qualified costs for U.S. Department of Labor accredited apprenticeship programs, which have been accredited by the U.S. Department of Labor.
These are only some of the many reasons to save in a tax-free 529 account. Ohio’s 529 college savings plan is a simple way to save for any higher education goal and it’s accepted nationwide. There is no fee to open an Ohio 529 Plan; the minimum contribution is $25. If you’d like to do more research, explore Ohio’s 529 Plan —The Plan That Can — at CollegeAdvantage.com.
Tim Gorrell is the executive director of Ohio Tuition Trust Authority. For almost 30 years, Ohio Tuition Trust Authority has sponsored and administered Ohio’s 529 Plan, CollegeAdvantage. Visit CollegeAdvantage.com or call 1-800-AFFORD-IT (233-6734) for more information.
Posted on May 22, 2020