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  • College Savings with a 529 Plan

College Savings with a 529 Plan

May 19, 2023 | By Nichole Coyle
Header for College Savings with a 529 Plan blog post.

May 29th is National 529 Day. This week Nichole Coyle, CERTIFIED FINANCIAL PLANNER™, talks about what a 529 plan is and recent changes that have made this education investment vehicle even more attractive.

A 529 plan is a college savings account that allows you to save money for your child’s (or other family member’s) college education. The account’s earnings grow tax-free, AND they are not taxed when they’re withdrawn as long as they are used for qualified education expenses. That means that no matter how much your money grows in a 529 plan, you’ll never have to pay taxes on it as long as the funds are used for education purposes.

Some benefits of 529 plans include:

Additional tax benefits

Certain states sponsor 529 plans and allow you to deduct some of the contributions from your state income tax. In Ohio, for example, you can deduct up to $4,000 per beneficiary per year with their sponsored plan. The amount has an unlimited carry-forward which means that the $4,000 is not an annual cap. In Ohio, you can contribute more than $4,000 in one year, then subtract $4,000 per year from your State of Ohio taxable income until all of your plan contributions have been deducted.

You, as the owner, have control of the funds

The beneficiary (likely your child) does not have control of the money inside the plan. This is a big benefit because you can make sure the money is used for its intended purpose. This also means that there is a lesser implication for financial aid purposes because the funds are counted as the parent’s and not the child’s asset.

There are no income limits

A 529 plan does not have income limits. Regardless of how much money you make, you can continue to contribute to these plans. There are, however, some limits on how much you can contribute each year. If you put more than $17,000 (in 2023) into a 529 plan for someone, you may have to pay gift tax on the contribution. If you are married, both you and your spouse can EACH contribute up to $17,000 for each beneficiary, totaling $34,000 per year per beneficiary.

You can start saving now! (even if you don’t have a kid)

You don’t have to wait until your child is born to start saving money for their education. You can start a 529 plan, list yourself as the beneficiary, and then change the beneficiary to your child once they’re born.

It can work as a backdoor ROTH IRA for your child

Beginning in 2024 you will be able to convert the leftover balance (up to $35,000) into a Roth IRA for your child. The funds must be in the 529 plan for at least 15 years before converting to a Roth. However, most 529 plans are established years before a child reaches college age, so the 15-year maturity within the plan likely won’t cause many issues. This could be a great way to jumpstart your child’s tax-free retirement savings in the event they don’t need to use their full account balance towards education.

Drawbacks of 529 Plans worth considering:

529 plans factor into financial aid calculations

Colleges consider 529 money when determining financial aid awards. Accumulated money in these accounts is included in the parent’s assets that contribute towards a child’s EFC (Expected Family Contribution). However, only 5.64% of a parent’s allowable assets are used in the calculation of EFC as compared to 20% of the child’s assets. This means that your child could receive less financial aid for having money in a 529 plan, but it’s a lesser impact than having the funds in a savings or investment account in the child’s name.

There are penalties for non-education use

If you choose to withdraw money from a 529 account and use it for something other than its intended purpose (or do not convert to a Roth IRA), you will pay regular federal tax as well as a 10% penalty tax on the earnings. However, if the beneficiary gets a scholarship to college, the penalty for withdrawing and not using it for education expenses is waived.

Accounts are subject to market risk

Many 529 plans are invested in vehicles similar to retirement accounts. This allows for long-term growth that can outpace inflation and potentially help with the rising costs of higher education. Investment accounts, while they have their advantages, also come with a certain amount of risk. So, if your child will be attending college in the next couple of years, a 529 plan may not be the best option for them. Talk with your financial advisor about your specific situation and find out if a 529 plan is right for you.

Conclusions

A 529 plan can be a good college savings plan for many families looking to save for school. Talk with a trusted financial advisor and consider the pros and cons of each option you have.

As always, if you have questions regarding 529 Plans or any other financial matter, please don’t hesitate to contact me!

 

Nichole M. Coyle

CERTIFIED FINANCIAL PLANNER™

20333 Emerald Pkwy

Cleveland, OH 44135

216.621.4644 x1607

Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a Broker-Dealer, and a Registered Investment Advisor.

Cetera is not affiliated with the financial institution where investment services are offered or any other named entity.

Investments are: Not FDIC/NCUSIF insured * May lose value * Not financial institution guaranteed * Not a deposit * Not insured by a federal government agency.

Investors should consider the investment objectives, risks, charges, and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.

Converting a Traditional IRA to a Roth IRA is a taxable event.

A Roth IRA offers tax-free withdrawals on taxable contributions.

To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five years, and the distribution must take place after 59 1/2 or due to death, disability, or a first-time home purchase (up to $10,000 lifetime maximum). Depending on the state law, Roth IRA distributions may be subject to state taxes.

Posted In: Guest Blog, Saving

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Bill Deighton

Bill has over 40 years of experience in credit unions and previously served as Chair of the Board of Directors for 30 years. Bill is a retired Captain of the Cleveland Fire Department. Along with his credit union experience, he has served for 16 years on the Ohio Police and Fire Pension Fund Board. He believes that credit unions are powered by providing the best customer service to members. Bill volunteers at St. Ambrose Parish and the Fire Museum renovation. Bill and his wife live in Brunswick and have two grown children.

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Anthony Missig

Tony is honored to have been the current Board Director since 1999. He has been a credit union member of Cleveland Fire Fighter since 1988. Tony graduated with a BA degree in Business from Hiram College and an MBA from Baldwin Wallace College. He is currently an Assistant Chief with the Cleveland Fire Department.

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Ben Laurendeau

Ben Laurendeau has been employed in the credit union industry since 1987 in a variety of positions. Ben has held the position of President/CEO with Firefighters Community Credit Union since January of 2005. Ben holds an Associate Degree in Accounting from Terra Community College, A Bachelor Degree in Accounting from Tiffin University and a Master of Business Administration Degree from Baldwin Wallace University. Ben serves as a Director on the Ohio Credit Union League Services Corporation Board and serves on the Ohio Credit Union League Audit Committee.

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Gary D. Arbeznik

Gary is a lifelong resident of Greater Cleveland and has been a member of the Board of Directors since 2018. Many of his family members have served in the Cleveland Fire department and are long-time members of FFCCU. Gary holds a BA from Columbia College and a JD g from Cleveland State University. He has worked for both Cuyahoga County and the US Attorney’s office in Cleveland during his legal career. Now retired, Gary and his wife live in Lakewood.

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Barbara McCullough

Barb is a current Board Director of FFCCU and a fully vested member. She has an MBA in Finance and has spent 25 years teaching to all walks of life. Barb is a volunteer with the Foundation for Geauga Parks, Ohio Department of Natural Resources, Lorain County Spirit of America, and Girl Scouts of Northeast Ohio. Barb is a lifelong resident of the Cleveland area. She and her husband have one daughter.

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Alyssa Garcia Evanoff

Alyssa Garcia Evanoff joined Firefighters Community Credit Union as the Chief Marketing Officer in February 2019. Alyssa has nearly two decades of experience in brand management and strategic marketing with a variety of organizations across the Greater Cleveland area. During her career, she has developed successful marketing and creative campaigns that have repositioned brand image and increased brand loyalty through emerging digital trends, content marketing and user experience strategy. Alyssa is a graduate of Miami University and sits on the board of the Cleveland chapter of the American Advertising Federation.

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Jessica Bittner

Jessica Bittner joined FFCCU as a teller in 2009. In 2012 she was promoted to branch manager, and has managed multiple branches throughout the credit union. Jessica holds a Bachelors in Human Resource Management & Business Management, with a minor in accounting from Baldwin Wallace University. She was promoted to COO in 2021.

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Kathleen Riggs

Kathleen Riggs joined FFCCU as Chief Retail Officer in 2013. Kathy has been in the financial services industry for over 25 years, holding a variety of positions. Kathleen received her bachelors degree in psychology from Kent State University and is a certified trainer of CUNA’s Creating Member Loyalty program.

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Paul Humphrey

Paul Humphrey was born and raised in Northeast Ohio. He joined FFCCU in 2017 as the Chief Lending Officer. Paul is a graduate of Kent State University. He holds the designation of Certified Credit Union Financial Counselor (CCUFC) from CUNA. Paul has managed lending programs in both small and large credit unions and brings that unique perspective to serve the members of FFCCU.

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John Carrick

John Carrick is the Chief Financial Officer of Firefighters Community Credit Union in Cleveland, Ohio. John was hired by Greater Cleveland Firefighters Credit Union (former name of Firefighters Community Credit Union) as an Accounting Assistant in February 1993, was promoted to acting CFO in 1995, and was awarded the position of CFO in 1996. John has assisted in the acquisition of multiple mergers for Firefighters Community Credit Union and has managed two different Merging Credit Unions during the merger process. John is a former member of the Audit Committee of the Cleveland Chapter of the Ohio Credit Union League. John holds a Bachelor of Business Administration degree from Cleveland State University.

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Dennis Corrigan

Dennis has been a member of the Board of Directors since 2017. He is invested in forming bonds between the Credit Union and the community and helping members improve their economic situations. He has a strong desire to have a voice in the decision-making process of an institution that he was raised with and believes in. Dennis has been a part of the Cleveland Fire Department for 25 years and is currently a Captain. Dennis and his wife live in the Cleveland area with their three children.

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Damian Borkowski

Damian has served on the Board of Directors for over 10 years. He has been the Citywide Service Manager for the City of Cleveland since 1983 and manages the demolition of houses and buildings. He holds degrees in Law and Engineering and is a member of the Ohio Bar. Damian lives with his wife in the Cleveland area. He has been a credit union member for 30 years.

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Rich Bowman

Rich serves as the Chair of the Board of Directors and has been a board member since 2009. He has been a Cleveland Firefighter since 1989 and is presently a Battalion Chief serving the city’s lower west side. Rich is a founding member and Treasurer of the Firefighters Memorial Ride. Since their inception in 2004, they have donated over $250,000 to the families of fallen Fire, Police, and EMS workers. He has a bachelor’s degree in Business Administration with a minor in Finance from Cleveland State University.

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James E. Polk

James is the Vice-Chair of the Board of Directors and has served on the Board since 1982. He has also held the position of Secretary. Jim is a retired Cleveland Firefighter after 30 years of service. He is the past treasurer of Fire Fighters Local 93 and served on the Union Executive Board for 18 years. Jim is also a former Worker’s Compensation Representative for Local 93 and the NOFF.

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Bryan Gallagher

Bryan has served on the FFCCU Board of Directors since 2006 and looks forward to continuing to help the credit union move forward and provide quality services to members. Born and raised in Cleveland, Bryan and his wife live in Lakewood and have three grown children. He holds a degree in Communications from Cleveland State University and spent 40-years as a cameraman for the MLB and NBA. After 33 years, he retired as a Captain from the Cleveland Fire Department. He is a former Sergeant at Arms for Local 93 IAFF and was Secretary for the Firefighters Memorial.

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Robert Schwind

Bob is a lifelong Cleveland resident and has been a member of FFCCU since 1993. He has served on the FFCCU board since 2019. Bob is a graduate of Cleveland State University and has served as a Cleveland firefighter for the past 28 years, becoming a lieutenant in 2002. He and his wife live in Cleveland and have two grown daughters.

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James Andrews, Jr.

Jim has been a credit union member for over 40 years and has served on the Board of Directors since 2012. He has been a Cleveland Firefighter for 29 years, currently stationed at Engine Company 13. James has served on the Cleveland Firefighters Relief Fund board and was a former Union Steward and Committee Member for Firefighters Local 93. He and his wife have three children.

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