By Cheryl Rapp, Edvest 529 College Savings Plan
September 5, 2023
All the myths surrounding 529 plans can prevent families from taking advantage of the great benefits of a 529 plan. To ensure families are well-educated and understand the facts around these plans, we’re debunking eight of the most common myths for you here.
But before we start, I want to remind you what a 529 college savings plan is. These plans are investment accounts specifically designed to help families save for future higher education and career training expenses. Funds saved in a 529 plan can be used for a variety of typical expenses associated with attending a post-secondary education – tuition, room and board, books, fees, and more at accredited institutions. You can find a 529 Plan from your home state, or one that works for your family here.
Now, let’s set the record straight on some of these myths.
Myth #1: It costs a lot to open 529 plans.
529 plans are designed to benefit families of all income levels. And while many plans can be opened with $25, some plans don’t require any initial deposit at all. Once an account is open, you can contribute amounts that fit within your means at whatever frequency works for your situation. For some families, this means making regular contributions each month from their bank account or via payroll direct deposit, and for some, it means making contributions at specific times throughout the year – tax refund season, birthdays, holidays, or other special occasions.
Remember, it’s about saving what you can within your means and not about saving the entire amount of your loved one’s higher education.
Myth #2: It’s too late to start a 529 plan.
This is a 529 plan myth we hear all the time. Not all parents and caregivers were able to set up a 529 plan when their child was a baby. So, is it still worth setting up a 529 plan for an older child? The truth is that it’s never too late to start saving for college.
Whether your child is starting to walk or learning to drive, there’s still time to save. 529 plans offer various investment options that cater to different investment time horizons and risk tolerance. The potential to invest in your college savings means the potential for growth, no matter the time horizon. Plus, research suggests that even a small amount of money set aside for college helps youth know that someone believes in their future.
Myth #3: I can only use my 529 at my state school.
Sometimes, parents and caregivers do not open and contribute to a 529 plan account because they feel they are locking their children into a specific state school. This is simply not true. Funds saved in a 529 plan can be used at any accredited higher education institution, both in-state and out-of-state, and even some schools abroad. This includes public and private colleges and universities, community colleges and technical schools, and graduate schools. You can use your funds for qualified expenses if the institution is accredited and eligible under the 529 plan rules.
Additionally, many states now allow your funds to be used toward apprenticeship programs registered with the Secretary of Labor.
Myth #4: If my child doesn’t go to college, I’ll lose all the money in the account.
Many people hesitate to use a 529 savings plan for fear that the child they’re saving for might not be interested in going to college when they graduate high school. This is an entirely understandable myth, but fortunately, it’s false.
First, it’s essential to understand that there is no timeline associated with when you need to begin spending your 529 savings. So, if the student you’re saving for doesn’t pursue higher education right away, that’s okay. You can keep your savings in the account in case they decide to attend school a little later in life.
Another option is to keep the money in your 529 plan and switch beneficiaries. This means that if circumstances change and the original beneficiary doesn’t need the funds, the 529 plan can be reassigned to another eligible family member without any tax penalties. The account owner can even name themselves as the beneficiary to pursue their own continuing education.
Suppose you choose to withdraw your 529 savings for something other than qualified education expenses (known as a non-qualified withdrawal). In that case, the earnings portion of the withdrawal is subject to federal and state (where applicable) income taxation, and a 10% additional federal penalty tax on earnings. Be sure to check with your plan for details.
Myth #5: 529 plans can only be used for traditional four-year colleges.
One of the most common misconceptions about 529 plans is that they cover only four-year degrees. The truth is you can use 529 plans for many kinds of training programs and postsecondary education. This includes accredited public and private colleges and universities, community colleges, technical schools, as well as graduate schools.
Some states also allow funds to be used toward K-12 tuition ($10,000 annually per student), to pay back student loans ($10,000 lifetime limit per individual), and to cover expenses associated with registered apprenticeship programs. Check with your state for eligibility.
Myth #6: I’ll miss out on financial aid if I have a 529 plan.
While it’s true that a 529 plan can impact your eligibility for financial aid, the effect is generally minimal. In fact, when calculating the Student Aid Index (SAI), parent-owned 529 plans are counted as a parental asset, which has a much lower impact on aid eligibility compared to student-owned assets.
Myth #7: Only parents can open a 529 plan for their child.
Anyone can open a 529 account for a beneficiary – not just a parent. Grandparents, aunts, uncles, and even friends, can open a 529 account for a loved one in their life. This flexibility allows more people to contribute to a child’s education savings and maximizes the benefits of these tax-advantaged accounts.
Additionally, it’s worth noting that there is no age limit for beneficiaries. And remember, the account owner can change the beneficiary at any time.
Myth #8: The tax benefits of 529 plans are overstated.
Contrary to this myth, 529 plans offer significant tax advantages. Not only do earnings grow tax-deferred, but qualified withdrawals are exempt from federal AND state taxes (when applicable). Additionally, many states offer state tax deductions or credits for contributions, further enhancing the tax benefits of these plans.
Ignore the Myths and Start Saving in a 529 College Savings Plan Today!
About the Author
Cheryl Rapp is the College Investment Program Finance Officer at the Wisconsin Department of Financial Institutions, which oversees Edvest, Wisconsin’s 529 Plan. Edvest has been helping families save for education since 1997. Rapp has over 22 years of experience working for the State as the College Affordability Specialist prior to joining the College Savings Program. Her experience includes educating students, parents, teachers, and school counselors on the value of and how to complete the Free Application for Financial Student Aid. In her current role as College Investment Finance Officer for the Wisconsin 529 College Savings Program, Rapp manages outreach to Wisconsin residents. She works to increase awareness of the plans among Wisconsin residents while helping them begin saving for their children’s higher education. She is a graduate of the University of Wisconsin-Green Bay, from which she earned a bachelor’s degree in Humanistic Studies.