The Ins and Outs of 529 Plans

For those of us with young children or grandchildren, the escalating costs of college tuition are on the top of our minds. Last year, tuition at public universities increased 6.5% at a time when consumer prices dropped 2.1%. According to the College Board, average annual tuition, room and board for a public in-state university was $14,793 for the 2009/2010 school year compared to $35,636 for a private 4-year school. Investing in a 529 plan is a great way for parents, grandparents and relatives to save for a child’s education and is beneficial in many ways. A 529 account has federal and state tax benefits, and won’t greatly reduce your chance for financial aid. In addition, Ohio has one of the best-rated state 529 programs.

First, 529 plans grow tax free and can be withdrawn tax free if used for qualified education expenses. Qualified education expenses include: tuition, room and board (limited to current allowance), fees, books, supplies and equipment. Not only are the accounts exempt from tax, but most states offer tax deductions or credits for the contributions. Ohio, for example, offers up to a $2,000 state deduction on contributions to a 529 plan.

If the 529 assets are withdrawn and not used for higher education expenses, the earnings will be taxed as ordinary income and are subject to a 10% penalty. Therefore, a primary concern of many parents is what to do with the account if their child does not attend college or receives scholarship money. In this event, the account owner can change the beneficiary to another family member or to him or herself. Additionally, the 529 assets could be used for expenses not covered by the scholarship such as books, supplies and room and board. If a student receives a full scholarship and funds are withdrawn and not used for higher education expenses, they will be subject to ordinary income tax but not a 10% penalty.

Furthermore, a 529 plan does not jeopardize the student’s chance of obtaining financial aid. The federal financial aid formula only considers 5.64% of the parent-owned 529 account in calculating the Expected Family Contribution (EFC). The EFC determines the amount of aid for which a student qualifies; a student can qualify for more financial aid with a lower EFC. Overall, there is little downside to owning a 529 account.

Ohio is one of the best states in which to open a 529 account. Ohio’s College Advantage 529 plan is a Kiplinger top 529 plan and is one of the highest-rated state plans at www.savingforcollege.com – a website that ranks and reviews all states’ plans and expenses. The Ohio plan is open to residents of any state and plan assets can be used to pay qualified higher education expenses at any eligible U.S. educational institution. Truepoint recommends diversified Vanguard and PIMCO funds with low expense ratios for our managed 529 accounts. We design a customized allocation based on the child’s age and rebalance to more conservative investments as the beneficiary gets closer to college age.

As you can see, 529 accounts are a great way to reduce the stress of college tuition and invest in a child’s future. If you have any questions, please don’t hesitate to contact us. If you’re not currently a client but would like to schedule an appointment, please contact Lisa Reynolds at (513) 792-6648 or [email protected].

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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