Alexander K. Ognenovski II, J.D.
Your guide to myth-busting the 529 Plan; and how to use it to your financial advantage.
Three main aspects when considering a 529 Plan:
- There are no limits on who can open a 529 college savings plan or who can contribute.
- 529 plan savings can cover a range of educational expenses, in addition to tuition.
- Money saved in a 529 plan may have only a small impact on financial aid eligibility.
What you don’t know could hurt you when it comes to saving for college—you could be missing out on benefits that could help you save. Many parents don’t know how much college may cost, how 529 savings plans work, or how college savings affect financial aid.
Below are six of the most commonly held misconceptions regarding these plans.
“Only parents can open a 529 college savings plan.”
False – Anyone may open a 529 college savings account—and can even name themselves as beneficiary. More importantly, anyone can contribute to the account.
“Funds in a 529 plan account can only be spent on tuition.”
False – Money saved in a 529 plan account can be used for a variety of education-related expenses.
In fact, funds in a 529 account can be used to cover far more than just tuition and fees—the funds in a 529 can also be used to pay for room and board, books and supplies, special services, and computers and related equipment.
“I will lose the money if the beneficiary doesn’t need all of it.”
False – the 529 Plan is designed so that you cannot lose unused money within the vehicle itself.
The funds saved in a 529 account are still yours if the original beneficiary does not need the entire amount. These funds may still be used for post-secondary education, for another beneficiary—or even for yourself.
Unlike a custodial account, the money belongs to the account owner—not the beneficiary. You can let the funds remain invested in the account in anticipation of your child continuing-on to graduate school or another post-secondary institution. You may substitute the beneficiary to another qualified family member, such as younger siblings, nieces, nephews, or grandchildren. If you pursue one of these options, you’ll want to rethink your investment strategy to reflect how soon the funds will be needed, so you can take appropriate advantage of the potential for growth over time. Further, if your child earns a scholarship and there are leftover college savings in your account, you only pay income taxes on the earnings portion of the money you take out to offset the scholarship.
“I can’t change the investments after opening the account.”
False – Here is how it works, generally:
Each 529 college savings plan offers a range of investment options, which might include age-based strategies; conservative, moderate, and aggressive portfolios; or even a mix of funds from which you can build your own portfolio. An age-based asset allocation strategy becomes more conservative over time by reducing its equity exposure as the fund’s target date approaches. Typically, plans allow you to change your investment options twice each calendar year. You may also adjust your strategy when you change the beneficiary, and you can change the allocation for contributions that are made to an account in the future.
“I can only select the 529 plan offered by my state.”
False, but evaluating your options can be a little confusing. There are many state-sponsored 529 plans. The differences between state plans include investment options, fees, and potential state-level tax deductions or credits. Some states offer residents state tax advantages or other benefits, which can be an important factor in choosing a plan.
You may open a 529 plan account in any state; but consider your own state plan first as it may offer additional tax benefits or other perks like financial aid, scholarship funds, and protection from creditors. Furthermore, some 529 plans may charge a fee to nonresidents. It’s a good idea to consider all of the costs involved when choosing investments.
“Saving in a 529 plan account could severely limit financial aid.”
False – This misconception can be particularly harmful if it keeps parents from saving. While it’s true that 529 assets do affect financial aid, it is a potentially small impact: Parent-owned 529 plan assets are considered a parental asset and are factored into federal financial aid formulas at a maximum rate of only 5.6%.
“Parents may underestimate college costs.”
College costs are increasing at a higher rate than inflation and it can be hard for parents to know how much money they will need for their children’s education. Nearly half of parents admit they do not have a good idea regarding exactly how much they should be saving each month.
Many parents underestimate how much college will cost by the time their child is ready to head to campus.
Estimating college costs*
|What parents estimate 1 year of college will cost when their child goes to college||Average projected sticker price for 1 year of college|
|Parents of kids in high school (average, assuming projected costs for students starting college in 1–4 years)||Public: $19,000|
|Parents of kids preschool and younger (average, assuming projected costs in 14–18 years)||Public: $28,000|
If you feel confused about your college savings options, consider reaching out to your financial professional or contact us. It could boost your confidence about how much and where you’re saving for college.
**Source: The College Board, Trends in College Pricing 2016, October 2016. Estimates assume the cost of college is growing at 2.98% each year. A straight average of total charges (tuition, fees, room and board) for a combination of public and private four-year colleges was used for this calculation. Note that total expenses include books, supplies, transportation and other costs.