Start Saving for College with a 529 Plan
A 529 College Savings Plan is a tax-advantaged investment account into which you can save money for college expenses. Money saved in the account is invested, grows tax-free, and can be withdrawn tax-free if used to pay for college expenses (or trade or vocational school expenses), such as tuition, room and board, on-campus meal plans, books, supplies, and more. Select states, including Ohio, also allow 529 Plan savings to be used for elementary and secondary private school tuition up to $10,000 per student per year.
Certain states provide additional incentives for saving in a 529 Plan such as state tax deductions or credits, or a match on contributions. Ohio, for example, offers residents a state tax deduction of $4,000 per year, per beneficiary, on contributions to Ohio and non-Ohio sponsored 529 plans. It is important to note that 529 Plans are run by the individual states and rules can vary based on your state of residence. Also, be mindful that 529 Plan rules may change overtime on both the Federal and State levels.
Though each state sponsors at least one 529 Plan (except for Wyoming), you are not obligated to choose your state’s plan. A good first step is to use a plan comparison tool, like the one on www.savingforcollege.com, to decide which plan is the best fit for you based on state tax benefits, investment options, investment performance, and fees. Also note if there is a minimum balance or minimum contribution requirement. Some plans allow you to enroll directly through the website, while others are sold through brokers or financial advisors.
Once you have homed in on the best 529 Plan for you, it is important to calculate how much to save to avoid overfunding. If withdrawals are used for anything other than qualified education expenses, you will have to pay taxes on the investment gains as well as a 10% penalty. To account for potential scholarships, grants, and other financial aid, as a rule of thumb, 529 Plan savings should cover no more than 80% of anticipated college costs.
If you do have money leftover in a 529 Plan, there are a few options available to avoid the penalty. At any time, you can change the beneficiary on the account to another child, grandchild, or even yourself. Some states allow savings to be used to pay down both federal and private student loan debt for the beneficiary or their siblings, up to a maximum of $10,000 per student. In addition, starting in 2024, you can transfer up to $35,000 from a 529 Plan to a Roth IRA for the named beneficiary.1 This is an option if the 529 Plan has been open for at least 15 years and the beneficiary has earned income.
One last consideration is the impact of a 529 Plan on the Free Application for Federal Student Aid (or FAFSA®). If the 529 Plan is owned by a parent or the student, it is considered a parent asset on the FAFSA® and will reduce the student’s need-based aid package by a maximum of 5.64% of the account balance. If a grandparent or other relative owns the account, it is not included as an asset on the FAFSA®, and starting with the 2024-2025 school year, withdrawals from a relative-owned 529 Plan will no longer be reported as untaxed income to the student. If you think you may qualify for need-based aid, consider having a grandparent or relative open the 529 Plan instead.
With the ever-rising cost of college, starting to plan and save for it can be daunting. If you are ready to start saving for college but are not sure where to begin, reach out to a Marcum Wealth Advisor today at 866-605-1901 or [email protected].
- Section 126: Rolling Over 529 Plan Funds into a Roth IRA by Jeff White, CFP®
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