By Jørn Earl Otte, Strategic Marketing Consultant, Hartford Funds SMART529
March 9, 2021
Welcome to March! (I think we’ve had enough madness for one year, don’t you?)
529 plans have been around since the 1990s; however, there are still misconceptions regarding what 529 plans are and how they can be used.
Test your knowledge about this important investment vehicle, and see which commonly held ideas about 529s are true, and which ones are the stuff of mythology. Good luck!
Sweet 16 Questions:
- I can only use 529 money for a school in the state that sponsors my plan: MYTH? or FACT?
It’s a MYTH! The FACT is: You can use your 529 account at any eligible educational institution in the country which meets specific federal accreditation standards. These institutions include most four-year colleges and universities, many two-year institutions and vocational schools, and some schools abroad. In addition, participants can even use funds for associate, bachelor’s, and advanced degrees.
- I can only use 529 money for tuition: MYTH? or FACT?
It’s a MYTH! The FACT is: 529 money can be used for most higher education expenses, including tuition, room and board, books, mandatory fees, and computers.
- 529 account can be used at vocational and technical schools, grad schools, and even for professional training: MYTH? or FACT?
That’s a FACT! Also, thanks to recent legislation, a portion of 529 funds can be used for K-12 private school tuition, as well as for apprenticeships.
Elite 8 Questions:
- If my child decides not to go to school, I lose the money in their account: MYTH? or FACT?
It’s a MYTH! The FACT is: You can transfer the 529 account you set up for your child to another family member with no tax penalty. This includes siblings, children, nieces and nephews, etc. If you choose to withdraw the funds as a non-qualified withdrawal, earnings are taxed at the taxpayer’s usual rate and may also be subject to a 10% federal income tax penalty
- There are no income restrictions to qualify for 529 plans: MYTH? or FACT?
That’s a FACT! There are no income restrictions or limits to be eligible to participate in 529 plans. Most states do have a maximum contribution limit for their 529 plan (for ex: $400,000 in West Virginia).
- Investing in a 529 plan dramatically lowers chances of qualifying for financial aid: MYTH? or FACT?
It’s a MYTH! The FACT is: 529 assets have a relatively small effect on federal financial aid eligibility because they are considered assets of the family on the Free Application for Federal Student Aid (FAFSA). 529 accounts are counted in family assets on the FAFSA at approximately 6%, like any other family savings. Greater effects on the FAFSA come when accounts are considered assets of the beneficiary (20%). Grandparents who open 529 accounts for their grandchildren have no direct effect on financial aid eligibility.
- I can only invest in a 529 plan through a financial professional: MYTH? or FACT?
It’s a MYTH! The FACT is: Most states have direct-sold plans, meaning you can open up the account yourself. Direct plans are specifically designed so that you can invest in your own account without needing any outside help; however, if you do feel like you need assistance, you should consult a financial professional.
Final Four Questions:
- I can make changes to my 529 account’s portfolio: MYTH? or FACT?
That’s a FACT! Currently you are allowed two investment changes a year without penalty, and you can start and stop contributions at any time.
- It costs a lot of money to open and maintain an account: MYTH? or FACT?
It’s a MYTH! The FACT is: Most plans require very little money to open an account and very low minimums for contributions. In some states, you can open an account for only $1, and can make further contributions at your convenience.
- Only I can open my child an account, and only a child can be a beneficiary: MYTH? or FACT?
It’s a MYTH! The FACT is: Generally, anyone can be named a beneficiary of a 529 account, and anyone can open an account for the benefit of someone else. The only requirement is that the beneficiary must be a U.S. citizen and must have a Social Security number. You can even open an account for yourself!
- Anyone can contribute to my child’s/grandchild’s 529 plan: MYTH? or FACT?
That’s a FACT! In most plans, anyone can contribute to an account that has been set up. Only one account owner can be set up per account, but other family members and friends can contribute through programs such as UGift.
- It’s too late to start saving in a 529 plan: MYTH? or FACT?
It’s a MYTH! The FACT is: It is never too late to start saving. Not only do many 529 plans offer tax deductions (deductions may be subject to recapture if distributions are non-qualified) in their home state, but the benefits of saving in a 529 are plentiful, and do not stop just because your child gets older. In addition, there are no age restrictions for beneficiaries so the money can be used if a child wanted to go back to school later in life. Even if your beneficiary is already in high school, you could still open an account to help them pay for books, tuition, and more. And you can continue to contribute to the account while they are in college or vocational school, or wherever they may pursue their education. There is no fixed timeline, and every beneficiary is different. Check out your state’s 529 plan and compare it with others or reach out to a financial professional for assistance.
Final Score: You win! 529-0. Congratulations, and good luck with your loved one’s educational future!
About the Author
Jørn Earl Otte is Hartford Funds SMART529 Strategic Marketing Consultant for the state of West Virginia.