Compound Interest Helps Your 529 Plan Take Off

Many factors help a 529 account grow. One is time. Another is automatic recurring contributions. And another is compound interest.

The good news about compound interest

What’s so special about compound interest? Well, simple interest is interest earned on the first contribution only. Compounded interest is interest earned not only on the initial contribution but also on every additional contribution, earnings from your 529 investment options, and the already accumulated interest. Compound interest can help your account with Ohio’s 529 Plan, CollegeAdvantage, grow even faster.

If you’d like to see the power of compound interest, U.S. Securities and Exchange Commission offers a calculator to input your information to see how compound interest can build up your college savings account. You can use this calculator with the Ohio 529 College Savings Estimator calculator, to start seeing how compound interest can help grow your Ohio 529 savings account.

Compound interest is especially powerful over an extended period 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. Whether you started saving for your child before they were born or if you are getting a later start, Ohio’s 529 Plan offers account strategy suggestions based on your child’s age. Celebratory milestones, like birthdays and graduations, are the perfect opportunity to start or ramp up your saving. You can also take advantage of Ugift, a unique code which you can share with loved ones so they can make contributions to your Ohio 529 account, and Upromise, a free loyalty program with which you can do your everyday shopping, eating out and traveling, and earn cash back to add to your 529 college savings account. You can review the appropriate guidance and choose for yourself the best path for your 529 account based on your child’s age — baby to toddler, kindergarten to elementary schoolmiddle schoolhigh school, and college.

Student loans: Where compound interest is bad news

In a 529 plan, compound interest works for your best interests. On the flip side, accrued interest on a student loan debt can set back your and your children’s financial wellness as the compound interest will grow on the borrowed funds as well as unpaid accumulated interest. So, it’s never too late or too early to start saving for your child’s future higher education costs. Every dollar you save today in a 529 account is money your child won’t have to borrow for their education and career training after high school. An investment in a 529 plan is an investment in your child.

Additional tax benefits for saving in a 529 plan

Your Ohio 529 account also grows your education savings through the three tax benefits.

First, all earnings in a 529 plan are tax-free. So, all the extra funds generated from compound interest, all the contributions, all the investment earnings that build up in your college savings account will not be taxed. This means all investment growth is available for you to use to your children’s future education and career training costs.

Second, your 529 for those qualified costs are also tax-free. And what are those qualified higher education expenses? They 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; and certain expenses for a special-needs student. These expenditures also include qualified apprenticeships costs such as fees, textbooks, supplies, and equipment like required trade tools. The apprenticeship program must be registered with the Secretary of Labor’s National Apprenticeships Act to use a 529 plan withdrawal. You can also make a tax-free 529 withdrawal to pay up to $10,000 a year for K-12 tuition at a public, private, or religious school.

Third, Ohio residents who contribute to Ohio’s 529 Plan, CollegeAdvantage, 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.

Since 1989, Ohio’s 529 Plan has been helping families across the nation save for their children’s education. Ohio’s 529 Plan covers qualified costs at any four-year college or university, two-year community college, trade or vocational school, apprenticeship approved by the U.S. Labor Department, or certificate program nationwide that accepts federal financial aid. Learn, plan, and start for as little as $25 today at CollegeAdvantage

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