It's Time To Hit The Books: Understanding 529 Plans

How do you feel about higher education?

Did you go to college? 

Did your parents help with the cost? Or do you have student loans?  (I sure do!) 

Are the payments manageable or are they holding you back from achieving some substantial financial goals? 

If you could talk to your 18-year-old self, what would you say? 

Don’t make a deal with the devil, maybe? 

Oops...what I meant to say was, don't make a deal with Sallie Mae or Navient or any other private student loan servicer.

I think you’d agree that college tuition in the United States has become exorbitantly expensive. You may feel the impact now as you’re finishing up your degree, watching your student loan balances increase semester after semester. Or maybe you’re like me, watching those huge student loan payments deducted from your bank account each month, wishing that money could be used elsewhere. 

Maybe your parents did pay for your schooling and you are incredibly grateful. 

However, as you move forward, growing your life and your own family, you feel completely overwhelmed. How expensive will college be when your children start med school or law school or art school or whatever school they choose?  

Something I regularly tell my clients and my students: 

Save Early

Save Often +

Save Automatically

Simple advice, yes, but that’s really all it takes when saving for a big expense like college or private school. Combining this advice with the power of compound interest will take you far in helping your children with their upcoming education expenses. 

One of the most popular tools for college tuition savings and more recently, K-12 education, is the 529 plan. Are you familiar with the ads for the Ohio Plan College Advantage? They seem to be everywhere lately, on the radio + TV, too! But these ads fall short. With so few details about what the plan actually entails, all we're told is how college is expensive (duh) and how you MUST start a 529 today! Thanks. Not helpful. 

So, I’m going to break down six common questions about 529 plans with answers in plain English. No wild financial jargon. Just the facts to help you best understand what a 529 plan is, and how it fits into your overall financial situation.  

1. What is a 529 plan?

To put it simply, a 529 plan (also known as a qualified tuition program) is a savings account for education. The account has special tax treatment when used for the right expenses and the money you contribute can be invested (or not) so the account value can grow over time. If you open the account you are the account owner. The person whose education expenses you are saving for is the beneficiary. 

2. What can I use a 529 plan for? 

Qualified education expenses for the beneficiary. These are expenses required by an eligible education institution for enrollment or attendance. This could be a higher education institution or K-12. Qualified expenses include: tuition and fees, books, supplies, equipment, a laptop and room and board (as long as the student is at least part-time).

3. How much can I put in the plan?

As much as you want. The contribution can’t be more than the amount necessary to provide for the qualified education expenses. Do you know how much a year of tuition plus room and board will be at Yale will be in 18 years? The IRS doesn’t know either. 529 contributions are considered gifts to the beneficiary. You currently can gift $15K per person per year without worrying about completing a gift tax return. It’s called the annual gift tax exclusion and that amount can increase year by year for inflation. If you don’t mind completing a gift tax return, you could give more. If you do give more, just keep in mind that for 2019 individuals have a $11.4 million lifetime limit on tax-free gifts. Do you have $11.4 million? I sure don’t. Does your kid need $11.4 million for college? Nope. So, basically, you’re all good. 

4. What is the benefit? 

So, why go to the trouble of creating one of these accounts when you could just open a regular investment account and put the savings in there? The answer: Taxes, taxes, taxes.  

In Ohio you can take up to a $4,000 taxable income deduction on your state taxes for your contributions per year. Then, your contributions invested in the account grow tax-free. Once your child needs the funds for their qualified education expenses, you can withdraw funds tax-free. That’s big money you’re saving for a great cause!

5. What if my child doesn’t go to college? 

So, she changed her mind about med school. Maybe she made it big as an Instagram Influencer and is now helping YOU fund your highly anticipated retirement. Maybe she made the decision to enroll in a trade and doesn’t need money for her apprenticeship program. Maybe she is your wonder child and received a free ride to Harvard Law (one can dream, right?). 

Yes, you budgeted and saved for years to grow this college fund for her, but now she doesn’t have a need for the funds. 

No worries. You can rollover any unused assets from her 529 plan into another 529 plan for another beneficiary, as long as they are part of the original beneficiary’s family.  Who counts as family? Pretty much anyone related by blood or marriage. You could transfer it back to yourself, in case you’d like to go finish that degree you never completed as an adult. You could save it for your future grandchildren. You could give it to your niece or nephew. The best part of all is that the rollover is non-taxable (as long as it goes into the account within 60 days). 

You could also withdraw the entire account balance and give it to Susie. However, the tax man wants his cut. Generally she will have to pay ordinary income tax on the distribution and she may be subject to an additional 10% penalty. There are a few exceptions so make sure you check with the IRS or your trusted tax expert before withdrawing the funds.  

6. Where can I get a 529 plan?

Each state has the ability to establish their own plan. Rules, investment options, and fees may vary from plan to plan. Ohio’s 529 plan is called College Advantage and you can find more information here:

You can open your own self-directed plan on the website (it’s super easy). If you have a financial planner who you would like to open and direct the investments for you, CollegeAdvantage offers an advisor directed plan through Blackrock. Talk to your financial planner for more information. 

Check out these websites for more information:

If you’d like help establishing a college savings plan to fit in with your other financial goals, let's work together. 

Happy Saving!