By: South Carolina State Treasurer Curtis Loftis, Administrator of Future Scholar College Savings Plan
May 15, 2017
If there’s something strange in your 529 plan, who you gonna call? I would hope you’d call on CSPN’s 529 Myth Busters!
In all seriousness, as we head toward National 529 College Savings Day – a day that brings awareness to the importance of saving for college with 529 college savings plans – it is important to address some common misconceptions that are often associated with these plans.
In the seven years that I have been in office, I’ve witnessed South Carolina’s Future Scholar plan help countless families save for college. I consider Future Scholar’s success one of my greatest accomplishments as State Treasurer. I truly believe in this financial product, which makes it all the more important to break down the myths that are spread. So, without further ado, let me address a few:
Myth: My 529 plan funds can only be used to attend a traditional 4-year college.
Fact: The money you save in your 529 account can be used at any eligible educational institution in the United States, including out-of-state and some international schools. Schools include:
• Two- and four-year public and private colleges
• Graduate and professional programs
• Certain vocational-technical schools
You can search for eligible educational institutions at the Federal Student Aid (FAFSA) website.
Myth: 529 plans have a negative impact on a beneficiary’s chances of receiving financial aid.
Fact: A 529 plan is treated as the parent’s (or account owner’s) asset in determining eligibility for federal financial aid, not the student’s.
• Assets held by the parents have less impact on needs-based financial aid eligibility than those held by the child, so a 529 plan may have less impact on eligibility as compared to assets held in the child’s name, such as a custodial account.
• Only 5.64% or less of the account’s value (based on the current financial aid formula) is factored in when determining your expected family contribution each academic year.
Learn more about the financial aid formula.
Myth: If the beneficiary does not go to college, your 529 savings are no longer attainable.
Fact: If your child decides not to go college, you can transfer the account to a new beneficiary as long as he or she is a relative of the original beneficiary. If your child receives a scholarship, you can withdraw up to the amount of the scholarship without a 10% federal penalty.
• The earnings on this withdrawal would be subject to federal and possibly state income tax
• Remaining funds can be used for educational expenses not covered by the scholarship, or a new beneficiary can be named.
Myth: I cannot transfer an UGMA/UTMA or Coverdell Education Savings Account into a 529 plan account.
Fact: Yes, you can. There are just certain restrictions.
529 plan accounts accept only cash contributions, so the assets in an UGMA/UTMA account must be liquidated. Check with your tax advisor about liquidation. There are restrictions on 529 Plan accounts that receive assets from an UGMA/UTMA liquidation, which are not present on accounts without UGMA/UTMA contributions:
• All withdrawals from the 529 account must be made for the benefit of the beneficiary. If the withdrawal is not used for educational expenses for the designated beneficiary, federal and possibly state taxes and a 10% federal penalty will apply to the nonqualified withdrawal.
• The transfer of assets held in a 529 plan is irrevocable under an UGMA/UTMA registration.
• The beneficiary will assume control of the assets upon reaching age 18.
Similarly, a Coverdell account must be liquidated first to make the transfer. Because taking a distribution from your Coverdell account to invest in a 529 plan is considered a qualified withdrawal, it is not subject to federal income tax.
These are just a few of many misconceptions. I encourage you to gather all the facts before dismissing the idea of opening a 529 college savings plan and visit CSPN’s FAQ page for any questions you may have.
About the author:
Curtis Loftis is the Treasurer of the State of South Carolina. He also serves as the administrator of South Carolina’s 529 college savings program, Future Scholar, which celebrates its 15th anniversary this year.