How can a 529 plan help me save more for college?

With the cost of a college education continuing to rise, it’s essential to start saving as early as possible. A 529 plan provides a variety of benefits for you to save for college expenses, including tax-deferred compounding and the potential for tax-free withdrawals if the money is used to fund qualified expenses such as tuition, fees, books and supplies.

Tax-Free Savings Growth

Investments in a 529 account grow tax-deferred while traditional taxable accounts are charged taxes annually on capital gains, dividends and interest. This means that 529 accounts retain more assets, creating a larger asset base which can compound over time.

The chart below shows the growth of a $70,000 portfolio invested when the child is born in both a taxable account and a 529 account.

Front of Chart

529 Savings grow faster

As the chart shows:

If you invest $70,000 when your child is born, over five years a 529 plan could be worth around $4,000 more than a taxable account.

Over 18 years, the difference could be over $28,000.

Comparing Account Types

There are many different ways to save for college including popular options like Coverdell ESAs and UGMA/UTMA accounts.

The chart below compares 529 plans to Coverdell ESAs and UGMA/UTMA accounts

Back of Chart

Points to consider when charting your education savings course

As the chart shows:

529 plans have more favorable contribution rules than Coverdell ESAs. While Coverdell ESAs have a contribution limit of $2,000 per person per year, 529 plans have very high contribution limits (e.g., $394,000 lifetime limit for Ohio's 529 plan). Additionally, all contributions to a Coverdell ESA must be made before the beneficiary turns age 18 while 529 plans do not have age limits for contributions.

You can invest in 529 plans even if you make too much to contribute to Coverdell ESAs. Individuals who earn over $110,000 (single) or $220,000 (married, filing jointly) may not contribute to Coverdell ESAs, but 529 plans have no income limit.

The assets in a 529 plan can easily be used for graduate school expenses. On the other hand, assets in a Coverdell ESA must be used or transferred by the time the beneficiary is 30 years old.

Using 529 may help you receive more financial aid than UGMA/UTMA accounts. That’s because assets in a 529 plan are considered the account holder's when applying for financial aid, even though the account is in the beneficiary’s name. That means the value of the account is counted at a lower rate (5.64% vs. 20%) when calculating a student’s financial aid eligibility.

Investing involves risk, including possible loss of principal.

An investor should consider the investment objectives, risks, charges and expenses associated with municipal fund-based securities before investing. More information about municipal fund securities is available in the issuer's Program Description. You may obtain a Program Description by clicking here or calling 866-529-8582. The Program Description should be read carefully before investing.

Any investment in a BlackRock CollegeAdvantage mutual fund-based investment option is not insured or guaranteed by the FDIC or any other governmental agency or other party, including the custodian/state of Ohio, the Tuition Trust, BlackRock or any of the mutual fund firms under contract with the Ohio Tuition Trust Authority. An investment in a BlackRock CollegeAdvantage mutual fund-based investment option is not a direct investment in a mutual fund itself. Participants assume all investment risk of an investment in the BlackRock CollegeAdvantage 529 Plan, including the potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Regular investing does not ensure a profit or protect against a loss in a declining market. The amount actually available for withdrawal will depend on the investment performance of the investment options chosen.

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