By Deborah Skolnik
January 25, 2023
You may have heard of 529 college savings plans, and even know the basics of how they work. Still, it can be tough to convince yourself that a 529 plan is right for your child. As much as you want to help your child reach their full potential, it may feel like a leap of faith to create a fund that can be used only for their future educational needs. Who knows if they’ll even go to college?
The more you understand about 529 plans, the less nervous you’ll be about investing in them. The funds accrued are surprisingly flexible, and can finance a lot more than just college tuition. With that in mind, you might want to start looking into a plan with an excellent record of returns!
“Investing in a 529 plan is an opportunity to save for a wide range of educational expenses and not have to rely solely on loans,” says Tim Gorrell, executive director of the Ohio Tuition Trust Authority, which oversees the state’s well-regarded 529 plan.
Why Open a 529 Plan?
What is a 529 savings plan? The concept behind 529 plans and its tax advantages are straightforward: They let you invest after-tax dollars in stock market options, and those funds grow tax-free. Withdrawals aren’t subject to taxes either, as long as they’re used for qualified educational expenses.
But what, exactly, are qualified expenses, and what happens to the money if your kid isn’t college-bound?
Those questions make some people uneasy. The answers, though, are totally reassuring.
“You can take your 529 funds to any educational entity recognized by the U.S. Department of Education,” Gorrell says. “That includes any trade, technical, private, and public school in the country.” Eligible expenses include, for example, using $10,000 of 529 plan money each year to pay for private school for kindergarten through 12th grade.
What Does a 529 Pay For?
Wondering how to use a 529? Even if your child chooses an apprenticeship over formal schooling, the funds you sock away in their 529 college savings plan will come in handy. You can use that money to ease your child’s journey towards a lucrative career in one of the many fields that don’t require a college degree, such as plumbing and carpentry.
“A lot of times, there may be startup expenses for things like equipment and tools,” Gorrell explains. “You can use your 529 for those, and for any other costs associated with apprenticeships.”
Speaking of expenses, if your child does go to a more traditional school, the 529 funds can cover other costs beyond tuition. It’s fine to use them towards room and board, and even off-campus housing (in which case, the cost is considered commensurate with whatever the on-campus fees are). “Books and computers are also eligible, along with any expense that might be unique to your child’s degree program,” Gorrell shares.
Payment is convenient, too. The account owner can have the money released directly to themselves, or have it sent to the school or beneficiary to pay for authorized expenses.
Passing Along the Savings
But what if the beneficiary doesn’t pursue any education or training at all beyond high school? That’s a scenario that might make any would-be 529 plan investor pause. After all, it could happen: According to the Census Bureau’s most recent findings, in 2021, nearly 28% of adults aged 25 and older ended their schooling with or before their high school graduation in the United States. Statistics from the Department of Labor indicate that as of 2021, most haven’t gone into apprenticeships, either.
In that case, even if your child joins that demographic, the 529 plan funds meant for them won’t go to waste.
“Very easily, the plan can be transferred to other children or grandchildren,” Gorrell explains. A large number of other family members are eligible for the transfer as well, including grandchildren, the beneficiary’s first cousins, and even their in-laws.
You Can Choose Any State’s 529 Plan
While every state except Wyoming has its own 529 plan, you aren’t limited by where you live. People can choose among all 49 of them. And it really does pay to shop around, because as you’ll quickly discover, states’ plans aren’t alike.
Among the handful of standouts, are the two 529 programs offered by Ohio. In 2021, its CollegeAdvantage Direct 529 Plan received a silver medal from Morningstar, a highly regarded financial services company, for the 10th year in a row. Ohio’s BlackRock CollegeAdvantage, which provides plan participants with guidance from a financial advisor, maintained a bronze ranking. These dual honors make Ohio one of just three states with a direct and an advisor plan that are both medal-class.
Now that you know just how flexible and beneficial 529 plans are, you can look into creating one for the child you love. Once you do, tell your relatives and close friends about it, because they and anyone else are welcome to make contributions to it. If you have an Ohio CollegeAdvantage Direct 529 Plan, for instance, it’s easy to help them chip in: Simply log into the account, request a special code, and then share it with them. When they visit the site, the code will take them to the correct plan.
Contributions make wonderful gifts. “There’s nothing like the happiness you feel if you can finish your education plan either relatively or completely debt free,” Gorrell says. Your investment in a 529 plan today will pay off down the road when it gives you and your child peace of mind.