In a recent survey on how Americans are saving for college, only 78% of families with children are saving for college, and only 48% of those surveyed are saving are using a 529 plan to do it! 529 plans can be an excellent tool to save for college, and they can help parents not only start saving, but accumulate enough funds to truly assist in covering their child’s college tuition and expenses. Unfortunately, many 529 myths still exist which prevent families from understanding the value of this important college savings tool.
So what are the most common myths about 529 plans?
Myth 1: I can only use my state's 529 plan
You can use any plan in any state; however, you may have to open your state's plan if you want to take advantage of any state tax credit for 529 contributions. You also aren't limited to only using one plan. For example, you can open your state's plan and fund it as needed to get the state tax credit, and open a separate account in another state which might offer more desirable investment choices or lower fees.
Myth 2: I can only use 529 savings to pay for colleges in my state.
529 savings plans can be used at any post-secondary educational institution eligible to participate in a student aid program run by the U.S. Department of Education. The list of eligible institutions even some international institutions can be found here.
Myth 3: Only parents can open 529 plans for their children.
Actually, anyone can open a 529 plan for any beneficiary, including a family member, a friend, or even yourself.
Myth 4: I can only contribute up to the “state’s limit” into the 529.
Many states offer a tax credit or deduction for 529 contributions, but don’t confuse the limit for getting a tax deduction with the amount you can invest in the plan. The IRS does not specifically limit the amount of money you can invest in a 529 plan; however, you are limited by the IRS gift tax rules.
Myth 5: I will lose my money if my child doesn’t go to college or they get a scholarship.
If you find yourself in this position, you have many options to ensure this doesn't happen. Option #1, you can change the beneficiary to another family member like another child, niece or nephew, or even yourself or your spouse. Option #2, you can use the funds for other post-secondary educational plans like trade schools or even cooking schools. Option #3, if you still have younger children, the funds can be used for private K-12 education. Option #4, the 529 funds can be used for graduate school as well.
If none of these options apply to you, option #5 is to take the money from the account as a non-qualified distribution. You will be able to get all of the money you put in out; however, you will pay taxes and a 10% penalty on the earnings you've made in the account.
Myth 6: 529 savings can only be used for tuition.
Actually, 529 funds can be used to pay for any “qualified educational expenses”. These expenses include tuition, room and board, textbooks, and even computer equipment. In addition, recent changes have made it possible to use 529 funds to pay up to $10k worth of student loans.
So why use a 529 plan?
529 plans have important tax benefits. Contributions grow tax-free and withdrawals for qualified higher education expenses are tax-free. Plus, many states offer a tax credit or deduction for your contributions! 529 plans are a great way to make sure you are saving to help with the costs of college, so don’t let these 529 myths stand in your way.
Knowing which vehicles to use for college savings, like a 529 Plan, is only half the battle when it comes to saving for college. It’s also critical to understand how much you’ll be expected to pay out of pocket so that you can set accurate savings goals and not get in over your head.
A college funding professional can help you develop a plan to understand exactly what your costs will be, and lower those costs so you know exactly how much you'll need to save, and to ensure you don't saddle your student and family with loans they won't be able to handle. If you would like to speak with an advisor from our team to see how we can help you develop a college funding strategy, schedule a free call with our team today!
Mike Bink, AAMS®, CCFS®
Mike works with families to simplify the college funding process and is widely recognized as an expert in college planning. He is passionate about empowering families to become informed consumers of higher education so that they don't pay a penny more for college than they absolutely have to.