Nine Myths About 529 Plans

Misinformation surrounds 529 colleges savings plans. Often, when I ask a family if they have a 529, the response is, “No, we didn’t start one because we heard...” So, let’s bust some myths! This topic might not be as thrilling as the television show MythBusters, but I think it is very exciting that research shows that families who save for education can end up paying two to three times less for college than families who borrow.

Myth #1: If I save money in a 529, my student won't receive financial aid.
Although the balance in your 529 plan is considered when determining your student’s financial aid eligibility, the impact is minimal. A 529 plan owned by a custodial parent or dependent student counts as a parent's asset on the FAFSA, and it may reduce need-based aid by a maximum of 5.64% of the 529's value.

Myth #2: A student can only attend college in the state where the 529 plan is administered.
Students can use 529 funds to pay for college in any state, regardless of which state sponsors the plan.

Myth #3: A 529 plan restricts access to my money.
You will always have access to your money. However, if you do not use your funds for qualified educational expenses, you will owe taxes and a penalty on the earnings of your withdrawal. Your principal balance remains tax and penalty free.

Myth #4: I can only use the funds for a traditional four-year college.
A 529 plan allows families to save for many types of education and training:

• K-12 tuition up to $10,000 per year (not available in all states)
• Technical or vocational schools
• Two-year and four-year colleges
• The conversion of unused funds to a Roth IRA in the student’s name (after 15 years and if the student has earned income)
• Student loan repayment (up to $10,000 lifetime limit).

Myth #5: If my student receives a scholarship, I will lose money.
If your student wins a scholarship, you can still use your saved money to pay for qualified education-related expenses not covered by the scholarship, such as room and board, books, supplies, and computer technology. You can also transfer any unused funds to an eligible family member or save the unused money for graduate school or student loan repayment.

Myth #6: If my child decides not to go to college, I will lose my money.
There is no time limit to spending down the money in your 529 account; your student can always decide to attend college at a later date. To avoid making a nonqualified withdrawal, account owners may consider changing the account beneficiary to an eligible family member, or using the funds for K–12schools, vocational/technical schools, apprenticeship programs, or student loan repayment.

Myth #7: It costs a lot of money to start a 529.
Most plans require a minimal contribution to open an account. Future contributions can be made at any time.

Myth #8: 529 plans are difficult to open and maintain.
Every 529 plan is managed by an investment firm that offers the services of a financial professional who can help with goal setting, allocations, and investment selections. If you want someone else to fully manage your plan, you can opt to invest in an advisor-sold 529.

Myth #9: It’s too late to open a 529 account if a student is in high school.
It is never too late to start saving. Everyone has different goals and financial situations. Maybe your goal is to save enough to help cover books and part of tuition with your 529 plan. Some families will try to save for all educational costs. Regardless, the account will still offer the same benefits: tax-free withdrawals for qualified educational expenses and a possible state tax deduction on your contributions (deductions vary by state).

The days of a student being able to work a summer job so they can afford to pay a tuition bill are long gone. Families need to plan for college in the same way they plan to buy a home or save for retirement. A 529 plan can be a useful savings tool and will provide your student with more options. What better gift for your student than investing in their future?