When you start saving for college with Ohio’s 529 Plan, CollegeAdvantage, you are planning ahead to pay for your children’s future higher education expenses. You are also counting on your 529 contributions to grow as your child grows to cover those costs. While enjoying the expansion of your Ohio 529 account through tax-free earnings, you are relying on your investments to grow, too. If you are wondering how the investments in your 529 work, there are a few major factors involved.
One of the key means of growth for a 529 college savings account are the investment options in which you select to save. The portfolios you opt to save in within Ohio’s 529 Plan are tied to the stock market, bonds, or cash, based on their asset allocation. The more stocks or equity within the portfolio, the more risk there is in the 529 account, which will be affected by the lows and the highs of the stock market. However, the equity within your 529 plan allows your college savings to grow as the market grows. The more bond or cash preservation options within the portfolio, the less the portfolio will be swayed if the stock markets experiences any bumps. With more conservative portfolios, your college savings may be better preserved for use in the near future.
Ohio’s 529 Plan offers different investment options to appeal to different types of savers — from set-it-and-forget-it age-based portfolios, to risk-based portfolios, to options with which you can build your own portfolio, including U.S. equity, international equity, balanced, fixed-income, cash preservation and banking options.
The available investment options include ready-made, age-based portfolios, ready-made risk-based portfolios, individual investment options, and FDIC-insured banking options. Ohio’s 529 Plan teamed up with trusted industry partners such as Vanguard, Dimensional, and Fifth Third Bank to offer these investment choices.
What if you want to change your investment options?
Your investment strategy or risk tolerance may change during the lifetime of your 529 account. It’s good to know that your 529 account does not have to stay in the same investment portfolio the entire time. You can exchange the asset within your 529 account twice in a calendar year for the same beneficiary. You will need to complete this form and mail it to the address listed on it. If you have any questions while working on this paperwork, our customer service representatives are here to help you at 1-800-AFFORD-IT (233-6734) from 8:30 a.m. – 6 p.m. Monday-Friday.
Time is also as a growth factor
The length of time during which you can save is the other critical growth component for your 529 college savings account, as it is with all types of saving. It’s best to start your 529 plan for your children’s future higher education as soon as possible. The longer amount of time you have to allow your 529 contributions to grow the better, as you can take advantage of the tax-free earnings and compound interest, which Albert Einstein describes as the eighth wonder of the world. If possible, you can open a 529 college savings account before your child is born to have a time span of eighteen years or more for your 529 account to expand. And if you start the college savings account before your baby is born, then you can ask for gifts of higher education at baby showers to immediately get your account off to a good start.
Compound interest helps to develop a 529
Simple interest is the interest earned on contributions only. Compound interest is the interest that grows on the contributions as well as any other accrued interest. For Ohio’s 529 Plan, compound interest is accumulated on the original as well as any additional 529 contributions, any earnings from the 529 investment options, and any accrued interest.
Let’s show the power of compound interest. Using the same dollar amount, we’ll create two examples for a college savings account: One with simple interest and one with compound interest. The starting and only contribution to the 529 plan is $10,000. We’ll set the principal — or the original contribution — to grow at 5% over the next 5 years. With these examples set, we can contrast the total interest accumulated in a simple interest account to a compound interest account.
With the simple interest example, the original contribution of $10,000 with 5% would earn $500 in interest each year. Over five years, the account would total $2,500 in a simple interest account.
With compound interest, the original contribution of $10,000 could earn 5% for a total of $500 in interest in the first year. In the second year with compound interest, the new starting point includes the interest from the first year added to the original contribution for a total of $10,500. With 5% interest, the total interest in the second year would be $525. In the third year, the new opening amount could be $11,025, which could grow an additional $551.25 assuming 5% interest. For the fourth year, the starting amount in the example is $11,576.25. At the end of the year assuming 5% interest, the amount could grow by $578.81. In the fifth year of this example, we have an opening amount is $12,155.06. Assuming 5% interest, the account could grow by $607.75. So over five years in this scenarios, the compound interest account could grow to $2,762.81.
So, the compound interest account could earn an additional $262.81 over five years in this scenario when compared to the simple interest account. And who wouldn’t like to have those extra funds in their 529 account as they prepare to cover their student’s future higher education costs?
If you’d like to see the power of compound interest, use this calculator from U.S. Securities and Exchange Commission to input your information to see how compound interest can build up your college savings account.
The effect of compounding is especially powerful over a long period of time as the amount of earned interest grows larger and larger. This is an excellent reason to start as 529 fund as early as possible for your child – to maximize the effects of compound interest in the account.
Automatic contributions also build a 529
Another simple and easy way to grow any savings account is through automatic contributions. Automatic contributions are deposits that are transferred based on an established schedule from your bank account to your 529 account.
Why is this method so effective? As Berkshire Hathaway CEO and Chairman Warren Buffet recommends, you “do not save what is left after spending; instead spend what is left after saving.” With automatic contributions, you can pay yourself and then your child’s future higher education first, rather than trying to set aside some dollars to contribute near the end of the pay cycle. Most account owners say it’s easier to set up the automatic contributions and then forget it. You can set these automated deposits according to your paydays or a monthly contribution schedule. Also, if you are opting to manually transfer money to your 529 account, you could just forget to do it.
It’s also simpler to set up your family budget if you include 529 automatic contributions. After all, you’re sending your money where you want it to go before any funds are siphoned off on all the other costs that unexpected show up between paychecks. 529 savings add up even when you’re depositing a small amount. If you’ve starting to save for college early in your child’s life, then you can start out with small contributions as you learn how to make your budget work.
529 tax advantages add to account
All earnings in a 529 plan are tax-free, so all investment growth is yours to cover college costs.
529 plan withdrawals to cover qualified higher education expenses are tax-free at federally accredited programs. These expenditures include tuition; room and board (on and off campus) when the beneficiary is enrolled at least half-time; mandatory fees; computer equipment and related technology as well as internet services; books, supplies and equipment related to enrollment and classes; certain expenses for a special-needs student; certain apprenticeship costs, and lifetime total of $10,000 to pay for the 529 beneficiary’s student loan debt.
Ohio residents who contribute to Ohio’s 529 Plan can deduct their contributions from their taxable state income. The deduction amount is $4,000 per year, per beneficiary, with unlimited carry forward. However, $4,000 is not a contribution cap. If an Ohio taxpayer contributes more than $4,000 in one year, they can continue to subtract $4,000 per year, per beneficiary, from their State of Ohio taxable income until all the 529 contributions are deducted.
Visit Ohio’s 529 Plan online to start saving today for your child’s future education. An investment in a 529 plan is an investment in your child where every dollar saved today is a dollar that doesn’t have to be borrowed later. A 529 account can be used for whatever school comes after high school. Learn, plan, and start with Ohio’s 529 Plan today at CollegeAdvantage.com.