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529 Plans: Creating a Winning Strategy for College Savings

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As college costs continue to rise, forming an effective strategy to deal with those costs is even more important. Over the past 10 years ending 2017, college tuition has increased 3.2% annually. The rate of cost increase has actually slowed – the prior 10-year growth rate ending 2007 was 4.0% annually! Despite a slowing growth rate in costs, a college education is still one of the largest expenses parents or grandparents may provide for their children or grandchildren.

It’s never too early to begin formulating a plan. As you begin to think about your situation, keep the following in mind:

Where should I be saving for college? 529 plans are generally the most tax effective way to save for college. In some states (including Ohio), contributions are tax deductible, but in all states, any growth on the contributions is tax-free, presuming the funds are utilized for qualified expenses. Start saving early, and you can realize the benefit of tax-free, compound growth on funds for future college expenses.

For Ohio Residents: Contributions to a 529 plan are tax deductible on your state return. Prior to 2018, the limit on deductions was $2,000 – in other words, the first $2,000 of contributions to an Ohio 529 plan were deductible on your state income tax return. In 2018, the deduction amount has doubled – you can now deduct $4,000 annually. Note that the deduction is per child – if you have two children and contribute $4,000 to separate 529 plans for each, that equates to an $8,000 Ohio tax deduction. Also keep in mind that unused deduction amounts carry forward – if you complete a contribution of $5,000 for one child in 2018, you have an additional $1,000 that can be deducted on your 2019 Ohio tax return.

Track your qualified expenses! As mentioned previously, 529 plans are a great option for saving for college. When the time comes to make withdrawals for expenses, be sure to track them – the IRS can and will ask for proof that 529 funds were utilized for education expenses. Making direct payments to the educational institution from the plan is recommended, but for other expenses (books, computers, or housing allowance, for example), make sure you maintain detailed records and keep your receipts.

My child is starting college next year - Should I still contribute? Maybe. In Ohio and other states that provide a state tax deduction benefit, you would receive the state income tax deduction, even if you are planning to withdraw the funds for school in the short term. And any interest earned on the funds while in the 529 is shielded from income tax.

Grandparent Contributions: Contributions to a 529 for your grandchildren can be a wonderful gift for them (and their parents!). A few tips:

  • In states such as Ohio, you can still receive the same tax deduction benefits described above.
  • As the account owner, you will control distributions for the child’s benefit – make sure you have named a trusted successor owner who can do the same in the future.

  • When it comes to financial aid eligibility, 529s owned by parents are treated more favorably than 529s owned by grandparents (your advisor can talk through the specifics of how this works).
  • Contributions to 529 plans are considered a gift and are subject to the same gifting rules as cash gifts to children or grandchildren.
  • Consider paying expenses directly to the educational institution, as these payments do not count against the annual gifting exclusion amount (which currently stands at $15,000).

529 Plans for K-12 Expenses?: Among the many changes introduced by the new tax code in 2018, 529 plan funds can now be utilized to pay for private school tuition for elementary, middle, and high school. Before considering this strategy, consult your advisor – while allowable, this may not fit with your specific college funding plan.

Involving the Kids: Saving and paying for college can be a valuable learning opportunity. As kids approach college age, have a conversation with them about the costs associated with a college education and how your family plans to handle this important investment in their future.  This is critical if you are expecting the child to contribute to their education, but valuable either way. It’s never too early to learn about “real world” financial decisions.

As always, contact your Foster & Motley advisor to discuss the specifics of your college savings plan.