Are You Fine with a 529?green.308 | April 2, 2012
I’ve been thinking about starting a 529 plan for my granddaughter. In case you’ve never heard of a 529, it is an education savings plan operated by a state or educational institution to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code.
Why do I want to do this? I see too many examples of indulgence and over-compensation at Christmas and birthday time amongst the children of my friends and family. Don’t get me wrong. I’m not a Scrooge. I will still give a small gift that is fun or meets a need, like clothing. But the majority of my cash is going to go towards something more useful. All of the toys, clothing, and games that children receive, not to mention holiday party expenses, will eventually be gone, forgotten, and/or trashed. I would like to take my hard-earned cash and turn it into something more productive for my granddaughter to use down the road.
You don’t need to be psychic to know that:
- Kids grow up quickly
- College is expensive
Fortunately, American families or individuals with a desire to save for future college expenses have more options now than ever before. Traditional investment choices—savings accounts, taxable investment accounts, annuities, and U.S. Savings Bonds—are still viable options, but you might want to consider a 529 college savings program instead.
How Do They Work?
529 plans are usually categorized as either prepaid or savings plans.
- Savings Plans are similar to a 401K or IRA in that you invest your contributions in mutual funds or similar investments. You will have several investment options from which to choose. Your account will go up or down in value based on the performance of the particular option you select.
- Prepaid Plans let you pre-pay all or part of the costs of an in-state public college education. They may also be converted for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges.
How do I know where my designee will want go to college?
529 Plans can be used to meet the costs of qualified colleges nationwide. In most plans, your beneficiary’s choice of school is not affected by the state your 529 savings plan is from.
Does my state offer a 529 plan?
Every state now has at least one 529 plan available. It’s up to each state to decide whether it will offer a 529 plan (possibly more than one) and what it will look like, meaning 529 plans can differ from state to state. You should research the features and benefits of your plan before you invest.
Is there any financial benefit to me as well?
You can’t use contributions as deductions on your federal income tax, but your distributions come out federally tax free. You may be able to deduct all or part of your contributions on your state income tax. Ohio residents who contribute to an Ohio 529 Plan receive a state income tax deduction of up to $2,000 “per beneficiary,” with no limit on the number of beneficiaries that can be deducted in one year. For example, if grandparents contribute $2,000 per year towards each of their ten grandchildren, they will be able to deduct $20,000 ($2,000 x 10) from their Ohio state income tax return.
Ohio State University Extension