During the past 10 years, the cost of tuition and room and board at 4-year public universities has risen by nearly 49%. To offset this sticker shock, simple investments specifically designated for college planning are a good way to go. A Section 529 college savings plan allows you to save for the upcoming higher-education expenses of a beneficiary of your choosing.
When the beneficiary withdraws funds from 529 plans for qualified education expenses, those withdrawals remain free from federal income tax. Such qualified expenses include:
- Room and board
- Equipment required for enrollment
529 Plans by State
Each state —and the District of Columbia— offers at least one 529 savings plan. There are two varieties of 529 plans: college-savings plans and prepaid tuition plans. Some plans, like California’s ScholarShare College Savings Plan, offer many different investment options, while others, like Massachusetts’s The U.Plan Prepaid Tuition Program, allow families to prepay certain high education expenses. Currently, prepaid plans are available in 11 states, and allow you to directly purchase future-use tuition for in-state public and some private colleges based on today’s cost.
Some states offer needs-based matching grants for a portion of the contributions made to your account, based upon your income level. Other states do not count 529 plan assets when determining state-based financial aid for current and incoming public college students.
While you can participate in nearly any 529 plan nationwide, you should always look at your home state’s plan first, as you may reap added state tax benefits or other resident incentives. You may compare 529 plans by state at the College Savings Plans Network website.
For example, both of the 529 plans in my state, Ohio, include a state income tax deduction of up to $2,000 per beneficiary —with no limit to the number of beneficiaries— per calendar year, with unlimited carry forward of excess contributions in future years. Residents can claim this deduction even if they do not itemize deductions on their tax return. Ohio also permits state tax deferrals on earnings and tax-free withdrawals.
Getting Started with a 529
The minimum initial contribution is $25; likewise, $25 is the minimum for all subsequent contributions. In Ohio, you can contribute up to a maximum total of $371,000; in most states, contributions top out at about $300,000.
Plan fees can range from $0 to $2,446 over 10 years (based on a $10,000 investment), so do your homework before taking the plunge.
Ohio’s CollegeAdvantage investment plans are available based on the following options:
- Beneficiary’s age
- Balanced/blended (Mix of stocks and bonds)
- Bank (100% cash)
- Capital preservation (cash)
- Fixed income (bond)
- Equity (100% stocks)
- Guaranteed (CD/savings account)
Most states offer many, if not all, of the above investment-option types.
The aged-based investment options provide a good mix of portfolios. Based upon the beneficiary’s age, these options become more conservative as the child approaches college age. So long as the funds perform solidly, the aged-based investment option is a good one.
529 plans are either direct-sold or advisor-sold. Direct-sold 529 plans typically allow you to control the account yourself, including transferring money, changing beneficiaries, withdrawing funds or reallocating your investments. If you are already working with a financial planner, ask that professional about the benefits of advisor-sold plans in your state.
Many states allow you to enroll online for a 529 plan, with you as the account owner and a designated child as the beneficiary. Information needed typically includes:
- Account owner’s Social Security number
- Account owner’s driver’s license/state ID card number
- Account owner’s bank account number (for initial contribution)
- Account owner’s bank account routing number (for initial contribution)
- Account owner’s valid email address
- Beneficiary’s Social Security number and date of birth
- Successor’s Social Security number (optional)
If the beneficiary chooses not to attend college, you have options for deferring the account, withdrawing the funds, or changing the beneficiary. You should, however, consult a tax advisor to learn the potential tax ramifications of these changes.