What is the College Advantage Ohio 529 Plan?

The College Advantage 529 Plan is a state-sponsored savings program designed to help families set aside funds for future education expenses. Administered by the Ohio Tuition Trust Authority, this plan is structured under Section 529 of the Internal Revenue Code, providing for its tax-advantaged status. The plan allows money to grow and cover costs of education after high school, including at colleges, universities, trade schools, and apprenticeship programs.

This program is not just for Ohio residents; anyone can open an account. It allows an account owner, often a parent or grandparent, to save for a designated beneficiary. The contributed funds are invested in various portfolios to generate returns that can later be withdrawn for educational costs. The plan is flexible, allowing for changes in beneficiaries and providing options if the beneficiary chooses not to pursue higher education.

Key Tax Advantages of the Ohio 529 Plan

The primary tax benefit for Ohio residents contributing to a College Advantage 529 plan is a state income tax deduction. Ohio taxpayers can deduct up to $4,000 in contributions per beneficiary, per year, from their state taxable income. This deduction is available to any Ohio taxpayer who contributes, not just the account owner. If contributions exceed the $4,000 limit in a single year, the excess amount can be carried forward to subsequent tax years.

For example, if a married couple contributes $8,000 to one child’s account in a year, they can deduct $4,000 on that year’s state tax return and carry the remaining $4,000 forward. If they have two children and contribute $4,000 to each child’s account, they can deduct the full $8,000 in the same tax year. This benefit reduces the contributor’s Ohio adjusted gross income.

On the federal level, any investment earnings within the 529 account grow on a tax-deferred basis. This means that as the investments generate returns, no federal or state income taxes are due on that growth. This allows the funds to compound more effectively than in a standard taxable brokerage account.

Another federal benefit is that withdrawals are tax-free when used for qualified higher education expenses. This tax-free treatment applies to both the original contributions and the accumulated earnings. The combination of state tax deductions for Ohioans and federally tax-free growth and withdrawals makes the plan an effective tool for education savings.

Understanding Your Investment Choices

The plan offers two distinct investment paths. The CollegeAdvantage Direct 529 Savings Plan is for individuals who are comfortable making their own investment decisions. This do-it-yourself approach provides a menu of investment options with varying levels of risk.

Within the Direct Plan, savers can choose from several portfolio types. Age-based portfolios automatically adjust their asset allocation, becoming more conservative as the beneficiary nears college age. Static, risk-based portfolios maintain a consistent allocation, while individual fund options and FDIC-insured accounts offer more direct control.

The second path is the CollegeAdvantage Advisor 529 Savings Plan, opened with a professional financial advisor. This option is for those who prefer personalized guidance in managing their portfolio. An advisor helps create a customized strategy, but this plan involves different fee structures than the Direct Plan.

Information Needed to Open an Account

Federal law requires the plan to collect and verify personal information for both the account owner and the beneficiary. For the account owner, this includes your full name, physical address, date of birth, and Social Security Number or Taxpayer Identification Number.

You will also need to provide the same information for the beneficiary: their full name, date of birth, and Social Security Number. During the application, you can also name a successor owner, who would take control of the account in the event of your death or incapacitation.

The application process requires you to make your initial investment selection, allocating your contribution among the various portfolios. If you plan to set up automatic contributions from a bank account, you will also need your bank’s routing number and your account number.

Making Qualified Withdrawals for Education

Funds can be withdrawn to pay for a broad range of Qualified Higher Education Expenses (QHEEs) without incurring taxes on the earnings. These expenses include tuition and mandatory fees at any eligible educational institution, which is any school that participates in federal student aid programs. Also covered are the costs of books, supplies, and equipment required for enrollment, and room and board expenses if the beneficiary is enrolled at least half-time.

Recent changes have expanded the use of 529 funds. They can now cover expenses for certain apprenticeship programs and the repayment of qualified student loans, which is subject to a lifetime limit of $10,000 per individual. Additionally, up to $10,000 per year can be withdrawn tax-free to pay for K-12 tuition.

To make a withdrawal, the account owner can log into their online account portal or submit a withdrawal request form. Funds can be sent directly to the account owner, the beneficiary, or the educational institution. The withdrawal should occur in the same calendar year the expense is paid, and the owner is responsible for maintaining records to prove the funds were used for qualified expenses.

Rules for Non-Qualified Distributions

Using funds for non-qualified education expenses is a non-qualified distribution with tax consequences. While original contributions are always tax-free, the earnings portion of a non-qualified withdrawal is subject to ordinary federal income tax and a 10% federal tax penalty.

State income taxes also apply to the earnings portion. For Ohio taxpayers who claimed a state deduction, the state recaptures the benefit by requiring the principal portion of the withdrawal to be added back to their Ohio taxable income.

There are exceptions where the 10% federal penalty is waived, such as the death or disability of the beneficiary, or if the beneficiary receives a scholarship. In the case of a scholarship, an amount equal to the award can be withdrawn without the penalty, though income taxes on earnings may still apply.

Under certain conditions, money from a 529 account can be rolled over to a Roth IRA for the beneficiary without taxes or penalties. This provision requires the 529 account to have been open for at least 15 years before a rollover is permitted.