Happy 529 Day!

May 29, 2019
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Today is May 29th and the college savings industry annually celebrates this day as “529 Day” (see what they did there? haha). While not recognized as an official National holiday, the day is used to raise awareness of the importance (and challenges) of saving for a child’s future higher education costs.

Residents of Ohio have the benefit of having a top rated 529 college savings plan available to them where they can get a state income tax deduction for contributions they make. Ohio’s CollegeAdvantage plan is unique in that it operates two different plans.

One is the “direct” plan that is the lower cost option using Vanguard “no-load” mutual funds and FDIC-insured deposit accounts through Fifth Third Bank. The other plan is the “advisor-sold” plan through a company called BlackRock and it offers BlackRock mutual funds and exchange-traded funds. The funds in the BlackRock plan are a little more expensive than Vanguard, but you’ll also pay a commission to your advisor with each deposit, which could be as high as 5.25% until you can qualify for breakpoints when you reach an account balance of $25,000 and more.

Both of them are highly rated by SavingforCollege.com (a leading resource center for 529 plans) with the Direct plan carrying the highest rated “5-cap” and the BlackRock Advisor-sold plan carrying a 4-1/2 cap rating. If you are setting up an account on your own, you would use the direct plan. If you use an advisor to help you, then the advisor-sold plan is usually offered by brokers that charge commissions; whereas the direct plan is recommended by fee-only investment advisors (who may or may not charge you an extra fee for their help with the 529).

Here are some facts about 529 plans that you should know:

  • The state of Ohio recently increased the tax-deduction amount you can receive. You can receive a state income tax deduction of up to $4,000 per year, per beneficiary. If you contribute more than $4,000 in a calendar year, you are allowed unlimited carry-overs where you can use up the deductions in future years that you may not be able to contribute that much. Any Ohio resident can take this deduction. For example, if a grandparent makes a contribution to the 529 plan that you set up for your child, they will be able to get a tax deduction as well.
  • You don’t have to use the Ohio CollegeAdvantage plan. You can use another state’s plan if you like it better. However, you won’t be eligible for the state of Ohio income tax deduction in that case. SavingforCollege.com is a great place to research 529 plans sponsored by other states.
  • The funds in a 529 plan grow in a tax-deferred manner, and if the withdrawals are used for qualified educational expenses, then it is all tax-free.
  • 529 plan funds can be used Nationwide at any accredited post-secondary school which includes most 2-year, 4-year, graduate programs, as well as vocational and trade schools. Also, new as of 1/1/2018, you can also withdraw up to $10,000 per year to spend on K-12 expenses.
  • If your child receives a scholarship and you won’t need all of the money in their 529 plan, you can withdraw up to the amount of the scholarship from the 529 plan and the IRS will waive the 10% penalty tax. You will still have to pay income taxes on the earnings if not used for qualified education expenses. Additionally, if you have excess funds in a 529 plan, you can change the beneficiary to any number of other family members related to the original beneficiary. This could be a sibling (including step-sibling), nieces, nephews, cousins, mom, dad, even the spouse of the original beneficiary if many years have passed and your child is now grown and married. This gives the account owner (typically a parent) many options to use the funds that might not be used by the original child beneficiary.

If you or someone you know needs help with planning for future educational expenses, please don’t hesitate to reach out to me.

-Matt Stewart, CFP®, ChFC®