Holiday shopping for kids can be hard. They have so much already, and the latest toys and games lose their luster not long after their initial thrill. But there’s one gift you can give today that will increase in value as the years go by – a 529 college savings plan.
“A 529 plan is a college savings vehicle,” says Mark Kleespies, a shareholder at Cincinnati-based THOR Investment. “It’s a way to save for a college education where you put away after-tax dollars but they grow tax free. They’re not taxed at all if you take them out for qualified expenses such as tuition, books, lab fees, room and board.”
“It’s a plan that allows folks, like parents, grandparents or anyone who would like to fund college for their loved ones, to take control in doing so,” adds Sharon Miller, who is in charge of client operations at Personal Choice Financial Advisors. “It’s an investment vehicle that allows folks to save for college.”
Most states have 529 college savings plans and while the rules associated with 529 plans are the same from state to state, the tax benefits vary. Any Ohioan that contributes to an Ohio 529 plan can receive a tax break on their state income tax returns.
Some parents worry about the limitations of opening a college savings plan in a certain state. What if, for example, a child has an Ohio 529 plan but would like to go to college in California? There’s no reason to worry. 529 funds can be used to pay for qualified higher education expenses in any state. And, if your child receives a full scholarship or decides not to go to college, the funds can be transferred to another beneficiary, like a sibling.
“One of the biggest disadvantages to the plan is that if withdraws are made for something other than qualified education expenses they are subject to income taxes and a 10% penalty,” says Miller. “It is very important that folks that invest in 529 plans intend to use those funds for qualified education expenses and know that going in.”
Did you know? Any Ohioan that contributes to an Ohio 529 plan can receive a tax break on their state income tax returns.
As we all know, college tuition is increasing much faster than the rate of inflation, and the cost of sending kids to college continues to grow. “You never know where your child will want to go to school,” says Kleespies. “We recommend that you start saving very early whether you go to an in-state school or not. Even if you can save only $25 or $30 per month, or $1000 a year, it helps just to build it up.” And when you start saving while the kids are young, the fund has time to grow.
For family and friends that want to contribute to a child’s education but aren’t the owner of their 529 account, the 529 Ugift program makes it easy to contribute. The program allows owners to generate a unique code that can be entered by friends and family when contributing online. The funds are then distributed directly into the child’s 529 savings fund.
With all of the plastic toys and soon-to-be-outdated fads already in your child’s life, why not give the child the gift of education this year? “In our opinion the 529 Plan is one of the best ways to pass assets on to the next generation,” says Kleespies. Miller agrees, “Providing funding for education? I can’t think of anything better than that.”