How to Start Saving for College in Oregon
“Knowledge is power. Information is liberating. Education is the premise of progress in every society, in every family.”
Today, one of my best friends in the world had a baby girl. I spent most of the weekend knitting her a little newborn stocking cap in a nice cotton variegated rainbow colored yarn. I’m so excited to see who this kid will become! Her mom is one of the sweetest, kindest, smartest and most driven women I know, so it will be no surprise to me that she grows up to be a college grad like her mom.
You know I can’t turn down a chance to share a picture of my own baby. Here is Avie at 4 months old in a sweater I knit.
I know my friends will soon think about setting up a college fund for their new baby girl. I had all the best intentions of setting up a 529 college savings account for my kiddos when they were really little, but somewhere between the bleary-eyed months of late-night feedings and going back to work after just 3 months, it fell off my radar screen. It wasn’t until my kids were 7 and 9 that I started their 529 accounts, and while I still beat myself up about waiting too long, I know that something is better than nothing!
I’m dedicating this blog post to baby Zora, her parents, and all the other parents out there that want to see their kiddos succeed after high school.
How to Save for College in Oregon
The best place to start if you are an Oregon resident, is to check out the website: https://www.oregoncollegesavings.com/
What’s the Oregon 529 Plan?
The Oregon College Savings Plan is the state-sponsored 529 plan. A 529 plan is an investment account that offers special tax benefits when used to pay for qualified education expenses for a designated beneficiary (i.e. your child). The money saved in the plan grows tax-free and can be used for tuition, books, room and board, computers, and more. Withdrawals are also not taxed as income as long as they are for qualified expenses.
Computers are an eligible expense to pay for from a 529 account.
What if my kid won’t go to traditional college?
And even if your kiddo doesn’t go to a traditional “college”, the funds can also be used at other post-secondary institutions like community college, apprenticeship programs and trade schools. The funds can even be used to fund their K-12 education, (although with K-12 you can only take out $10,000 a year tax-free).
Who can contribute to my child’s 529 account?
If other people in your life are interested in supporting your child’s education (hello Aunties and Grandparents!) they can also contribute to the account through a personalized “gift page” for your child’s 529 account. They can also open their own 529 accounts and establish your child as the beneficiary. Gifts can be as small as $5 and can come with an e-greeting card.
A one-time gift of $100 to a baby’s 529 account could grow to $316 by the time they are 18 (assuming a 7% annualized return for 17 years).
Tell me more about the tax benefits
If you meet certain contribution amount limits during the year, Oregon will also give you an refundable annual tax credit up to $170 for single filers and $340 for joint filers. (Remember— tax credits offset your tax bill dollar-for-dollar, unlike tax deductions which simply lower the amount of income you get taxed on.) If your annual income is between $70k and $100k, you need to contribute $680 if single and $1,360 if filing a joint tax return (which is just $113/month to earn a 25% return on investment-per year, assuming you are in that income bracket). The tax credit benefit declines at higher income levels, so be sure to check the chart here:
Anyone who contributes to a 529 account, including family or friends, can claim the annual tax credit as well. Just be sure to make your contribution before you file your tax return, which is typically due April 15th.
One more bonus— the Oregon Plan will give you a $25 bonus if you open an account either before the kid is 1 year old OR if they are in kindergarten (age 5 or 6).
What if our kid gets a scholarship or we don’t use all the money in the account?
You can always change the beneficiary on the account (to another child, family member or even yourself if you are a student). And thanks to the recent SECURE 2.0 Act, money from your 529 can be used to pay down student loans and can even be rolled over into a Roth IRA account. Starting on Jan. 1, 2024, up to $35,000 of leftover funds in a 529 account can be rolled over into a Roth IRA account, provided the fund is at least 15 years old. And, while not always advisable, you can always cash in the account and pay income taxes plus a 10% penalty on the distribution.
Click the link on the photo to learn more about the new opportunity to roll 529 money into a Roth IRA.
If this is an investment account, what are the investment options?
One of the drawbacks of 529 plans is that the investment options are pretty limited to what the plan offers. The Oregon College Savings Plan partners with an investment company called Sumday to offer several options that are low fee and “set it and forget” type programs. The first option is their College Enrollment Year Portfolios which work a lot like retirement target-date funds. The longer the time until the money is needed, the more stocks (i.e. risk) is allowed in the portfolio. You would say these portfolios are focused on “growth”.
As the year of college enrollment gets closer and closer, the portfolio automatically dials back the risk, adding more bonds and reducing stocks. The portfolios with more bonds and short-term bonds are focused more on preserving the capital. It would be a huge bummer if, right as your kid is about to start college, stocks had a big pullback and the value declined by 30%.
There are also static portfolios that can be chosen, but the risk profile will stay the same unless you make a change in the investment selection. One interesting investment choice here is the “Social Choice Balanced” Fund which is always 60% stocks and 40% bonds. The fees are slightly higher because there is some extra work put into choosing stocks and bonds that meet certain environmental, social and governance criteria. The total cost of the portfolio is 0.47% per year compared to 0.25% per year for a College Enrollment year portfolio.
In Summary
It’s best to start early when saving for college so that time can work in your benefit as the investments have a longer time to grow. But it’s never too late to get started taking advantage of this tax-advantaged account. Plus, studies from the Center for Social Development show that children with even a small college savings account are 2.5 times more likely to enroll in and graduate from college than children with nothing set aside for higher education.
Stay tuned for more blog posts on Education Planning!
Full Disclosure: Nothing on this website should ever be considered to be advice, research or an invitation to buy or sell any securities. Please see the Disclaimer page for a full disclaimer.
About the Author:
Stacy Dervin, CFA, CFP® provides fee-only financial planning and investment management services in Eugene, Oregon. Tailored Financial Planning (TFP) serves clients as a fiduciary and never earns a commission of any kind. As a financial advisor, Stacy is on a mission to help Gen X and Gen Y families and small business owners be truly proactive about their financial futures.
