The 529 plan is a financial savings plan where adults invest money to pay for future educational costs. Credit: Screenshot of College Advantage
Instead of banking on full-ride scholarships, financial planners recommend tuition-payers invest in 529 plans to pay for college and educational expenses — including the cost of housing which can exceed $6,000 in a school year.
The 529 plan is a financial savings plan by which adults — the students themselves or their parents — invest money to pay for future educational costs, David Bowman, founder and lead virtual planner of Outsourced Planning, LLC, said. The costs must be qualified, and on-campus and off-campus housing and tuition are just some expenses that meet the criteria.
Payments from 529 plans amount to about 9 percent of overall tuition payment types, Tony Newland, university bursar at Ohio State, said. This is the second-most common method of paying the university, with the most common being online check payments.
Accounts differ from state to state, Newland said, but the university gets the most 529 plans from Ohio.
“We apply it to the tuition account, then it can pay whatever is on the tuition account and then anything in excess can get refunded back to the student,” Newland said. “It can go towards your instructional fee, your general fee, program fees, housing, anything like that.”
The plan allows for someone to invest after-tax money without having to pay a capital gains tax — a tax paid on any growth an investment has — Bowman said.
Bowman said that in Ohio, individuals get a tax deduction of up to $4,000 a year on state tax returns for having 529 plans.
“Let’s say you and your wife have two kids,” Bowman said. “Kid No. 1 is beneficiary of the first one. Kid No. 2 is beneficiary of the other one. Combined, you and your wife can each take $4,000, so $8,000 total per beneficiary [child] is a $16,000 deduction.”
Bowman said there is a concern with overfunding because there is uncertainty as to how much money will be needed for the fund. If all the money is not used for qualified education expenses, there is a penalty and normal tax on the capital gain.
Newland said the lead time is another potential con of a 529 plan. Lead time is the time it takes from the request for the money being made until the check is sent, and at Ohio State, the lead time is four to six weeks.
There is also the potential that the intended beneficiary might not need the fund, but Bowman said the beneficiary can be changed at any time to anyone, so the cons are outweighed by the potential benefits.
