If you're planning to put a child or another loved one through college and you live in Ohio, you should know about the state's 529 CollegeAdvantage college savings plans. Investments in these accounts grow free of federal and state income taxes, and all withdrawals used for qualified higher education expenses are exempt from federal and state income tax. In addition, contributors to the plans may be able to deduct up to $4,000 per child from their taxable state income.
Through this plan, family members and even friends can contribute to a child's college fund. (Since January 1, 2018, 529 accounts in many states, including Ohio, may also be used for expenses at an elementary or high school.) The maximum amount that can be saved for a single beneficiary is $400,000.
College plan money must be used for the following qualified expenses: tuition and fees, computer equipment and related technology and services, books, supplies, any equipment required for enrollment or attendance, room and board costs during any academic period in which the beneficiary is enrolled at least half-time, and certain expenses for a special-needs student.
U.S. residents may participate in 529 plans for a state in which they do not live, but they could lose in-state tax benefits by doing so.
Two Kinds of Plans
Ohio offers two types of 529 plans, both of which are designed to help save for higher education, including community colleges, four-year public or private colleges and universities, trade and specialty schools, certificate programs, graduate programs, law school, and medical school. The Ohio plans, like other such state plans, are named after the numbered section of the Internal Revenue Service code that authorized states to create them.
Sold directly through the state, this plan is managed and distributed by the Ohio Tuition Trust Authority. The plan offers two options that automatically change the balance of investments among asset classes as the beneficiary gets closer to their high school graduation: a college-enrollment-date option and an age-based option that enables investors to choose from aggressive, moderate, or conservative risk strategies.
The plan also lets you choose among five static, index-based portfolios that vary by risk (aggressive growth, growth, moderate growth, conservative growth, and income) and 15 individual investment options. The latter focuses on different investment categories such as international equities, balanced (mix of stocks and bonds) funds, and capital preservation through a money market fund. Most of these individual options are funds managed by The Vanguard Group or Dimensional Fund Advisors. Two of them are banking options whose contributions and interest income are insured by the Federal Deposit Insurance Corp. up to $250,000: a Fifth Third Bank savings account or certificate of deposit.
This is an advisor-sold plan whose investments are managed by BlackRock Inc. Investors can choose among target-date options whose investments become more conservative as the beneficiary gets closer to enrollment; target risk options that follow a consistent moderate, growth, or aggressive growth strategy; or 17 single-strategy options such as inflation-protected bonds or equity dividend. The options are mostly BlackRock-branded funds with a few non-BlackRock choices.
Most plan options are subject to fees. Unless otherwise stated, returns are not guaranteed, and investments made in the plans could lose money.
529 Plans Vs. Other Savings Accounts
Ohio residents trying to decide whether they should use an Ohio 529 plan or other savings vehicles need to account for the potential savings of a state income tax deduction. While the deduction is attractive, it may not offset the benefits of using other, nondeductible accounts, such as a Coverdell Education Savings Account or Uniform Transfers to Minors or Uniform Gifts to Minors custodial account.
Talk to your financial advisor or a similar professional about which plan is likely to give you the greatest benefit.
Gift Tax Exemption
Ohio residents can contribute up to $75,000 in one year ($150,000 for a married couple filing jointly) per beneficiary without incurring a federal gift tax. However, they can not make any additional gifts to that beneficiary for five years. Alternatively, a single resident can contribute up to $15,000 a year every year—and a married couple can contribute up to $30,000—without incurring the gift tax.
Any plan withdrawals that are used for something other than qualified education expenses are subject to federal and state income taxes as well as a 10% federal tax penalty.