By Jørn Earl Otte, Hartford Funds’ Strategic Marketing Consultant for SMART529 in West Virginia

We all intuitively know that the more education our children can obtain, the better their chances for a higher-paying career. As your loved ones’ education increases, their potential for a higher salary does as well. It is also important to note that successful careers don’t always require a college degree. Skilled labor positions can provide an excellent income. The number of those positions continues to grow. And as it does, more well-trained skilled workers will be needed to fill those positions. However, almost all of them require some post-secondary education, and that education rarely comes free.

Unfortunately, as so many Americans have discovered, the dollar figures associated with getting a degree of any type can be astronomical. Higher education costs have skyrocketed over the last several years, and there’s no indication that that trend will change. As these costs become more prohibitive, families will seek to find more ways to remove or at least reduce that financial burden.

529 programs can be a source for families to save for higher education, however there are many misconceptions about what 529s can be used for, and when and where funds can be distributed.

Let’s dispel some myths and find a few facts about 529 plans – hopefully, these will help you and your family as you seek to fund your loved one’s future education:

  • Myth: Funds can only be used at an in-state college.  FACT: Funds can be used for qualified higher education expenses at any eligible educational institution, regardless of whether that institution is in-state or out-of-state. An eligible educational institution is any accredited post-secondary institution like a college or university, but most vocational and technical institutions also qualify. An institution simply must be eligible to participate in the federal financial aid program. This even includes many foreign institutions.
  • Myth: If my child doesn’t use the money for college, we will lose the money.  FACT: Account owners maintain control of the account, even after the beneficiary reaches the age of maturity, so you get to decide when and where funds are distributed. Should your beneficiary not need the funds in your 529 account for whatever reason, you have many options. Among those options – you can transfer the beneficiary to anyone in the immediate family; you can simply withdraw the money and use it for non-educational expenses, though doing so can incur taxes and penalties; you can potentially roll over a portion of the funds tax-free into a Roth IRA, subject to federal laws and exclusions. Please consult your tax advisor for further details.
  • Myth: 529 funds are only for tuition.  FACT: The monies from your 529 account can be used for tuition, books, room, board, supplies and more. Due to legislation passed in 2017, funds can also be used for K-12 private school tuition – tuition only – up to $10,000 a year, as well as for costs associated with apprenticeships. Check with your state’s 529 plan to see if you can use this benefit, as not every state 529 program allows this qualified higher education expense. Note: Non-qualified withdrawals are taxable as ordinary income to the extent of earnings and may also be subject to a 10% federal income tax penalty. Investment returns are not guaranteed, and you could lose money by investing in a 529 plan. 
  • Myth: Only parents can open accounts.  FACT: When opening a 529 account, you do not need to have a particular relationship with the beneficiary. In fact, an account can be opened by anyone for anyone. While accounts are usually opened by parents or grandparents, an account owner can be any individual, corporation, partnership, trust, state, or fiduciary. Also, contributions can be made to any account by any interested person. For example, grandparents can contribute to an account opened by a parent and vice-versa. Aunts, uncles, friends – they all can also contribute. 

Other important things to consider

  • Check with your state’s 529 plan(s) to see what state tax benefits, if any, there may be. Some states allow their residents to apply a dollar-for-dollar deduction to their taxable state income for every dollar they contribute to a 529 plan.
  • There is no limit to the number of accounts for any one beneficiary, and anyone can contribute to an account no matter who the owner is. There are no limitations on a person’s income when it comes to opening an account, and contributions to an account can be in any dollar amount. However, please consult your accountant or tax professional regarding any federal gift tax implications. 

It’s always smart to start saving while your child is young, as even small amounts saved on a regular basis can add up over time. But don’t be dismayed if your child is in middle school or even high school. Every dollar you save for them today is a dollar they won’t have to borrow from a lender tomorrow. Unfortunately, many people think that if they can’t save everything, why save anything? Instead of having an all-or-nothing attitude about savings, adopt a “something is something” outlook. It’s still worthwhile to save something for college, no matter how little or how much. Many students graduate with heavy debt that takes decades to pay off.

Even if you can’t eliminate student loans for your children, perhaps you can lighten the debt load for them after graduation. Perhaps your investment will pay for all of their books or may even be enough to cover one, two, or even three years of college for them. You can be proud of whatever savings you accumulate knowing that every dollar makes a difference for them and for you.

About the author:

Jørn Earl Otte is Hartford Funds’ Strategic Marketing Consultant for SMART529 in West Virginia. Please note that all of this information is provided here for educational purposes only, and is not intended to provide tax, accounting, investment, or legal advice. Please consult the appropriate professional should you have any questions regarding these issues.

Before investing, an investor should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s 529 plan.

For more information about any 529 college savings plan, contact the plan provider to obtain a Program Description, which includes investment objectives, risks, charges, expenses, and other information; read and consider it carefully before investing. Hartford Funds Distributors, LLC, serves as distributor and underwriter for some 529 plans.