Busting the biggest myths about 529s
By Ashley Durham, senior writer, my529
September 17, 2024
This just in — If you have extra 529 funds, why not send your furry friend to obedience school by leveraging the new 52k9*?
*In truth: 529 plans haven’t gone to the dogs — and “52k9” is not a qualified education expense. That means you can’t change your beneficiary to your good pup, either, though they are a member of the family (just not for tax purposes).
There are, however, several real misconceptions about what 529 plans are and what they can do, myths that plan representatives often encounter when speaking with community members and prospective account owners.
Myth: I didn’t open a 529 account when my child was a baby. It’s too late to get started.
It’s true that opening a 529 account when a child is young can give any contributed money the potential to grow over time. The earlier an account owner starts, the better, as they can maximize the effect of time on their savings. The next best time to open an account, though, is today. If a student is in junior high or high school, any funds set aside can still be put toward qualified education expenses. While the money they save may not pay for their education in full, perhaps they could cover a few semesters’ worth of books and supplies or room and board, in turn reducing the need for student loans. Saving — even small amounts — costs less than borrowing because of the interest required with repayment.
Myth: I don’t want my funds tied up if I have money left over in my 529 account.
529 plans provide flexible options for account owners if funds remain after a beneficiary completes their education. Account owners can change the beneficiary to another member of the family so that the new beneficiary could use the funds for their education. They can preserve a legacy account for the next generation, such as a grandchild. And now people can roll over unused funds to a Roth IRA for the beneficiary, with certain restrictions, a new option that has proven popular since it went live in January 2024. They can also choose to withdraw the funds with the awareness that the earnings, not their original contributions, are subject to taxes and penalties. Bottom line: The money in their 529 account is theirs, so they can determine the best course of action, consulting their tax advisor if necessary.
Myth: Why should I save? I worked my way through college and my kid can do that, too.
Many parents and guardians take pride in their experience of working their way through college with a summer or part-time campus job. They expect their child could do the same.
However, as tuition increases continue, that scenario becomes much less likely. For context, from a recent College Board publication, in 1993-94, the average published tuition and fees for public four-year colleges and universities was the equivalent of $5,380 today. In the 2023-24 academic year, the numbers for tuition and fees for the same institutions totaled $11,260. (Note: All numbers include an inflation adjustment.)[1]
Certainly, a student could work while attending college to offset costs, but their efforts may not yield the same results as the previous generation. Plus, balancing work hours with coursework could hinder grades or progress toward graduation. Funds set aside in a 529 account could make a marked difference toward completion of a certificate or a degree. Account funds could pay for some or all of a beneficiary’s education expenses, leaving more time to focus on their studies and lessening the likelihood of student loans.
Myth: My child will receive a scholarship, so they won’t need a 529 account.
Scholarships and financial aid can be vital components of a family’s educational planning. Consider the value-add of a 529 account: It could complement a scholarship, as the award amount may not pay for everything their child needs for their higher education experience. For example, if a scholarship covers tuition and fees, other qualified education expenses like room and board, books, supplies, and computers could factor in.
Additionally, if a 529 account’s beneficiary receives a scholarship, the owner of the account can withdraw 529 funds up to the amount of the scholarship without incurring a 10% federal tax penalty on earnings. (The earnings portion of the withdrawal, however, would be subject to federal and state income taxes.)
Myth: My child is more interested in pursuing a technical education, so 529 funds won’t work there.
Technical colleges, trade schools, and registered apprenticeships can be destinations for students and their 529 funds. As students have myriad options for postsecondary education, the term “college” has expanded beyond the traditional definition. 529 plans encompass a wide range of eligible educational institutions, including two-year and four-year colleges and universities, technical colleges and trade schools, graduate schools, and registered apprenticeships. Beneficiaries can use their funds close to home or across the country, as long as the school is eligible to participate in federal student aid programs.
Important Legal Notice
Investing is an important decision. The investments in your account may vary with market conditions and could lose value.
About the author:
Ashley Durham is a senior writer at my529, Utah’s educational savings plan. She was an educator at the secondary level for 17 years, where she taught Advanced Placement English Literature and Composition, among other courses, and wrote countless college recommendations for high school seniors. Ashley has a master’s in education from the University of Utah. She has been with my529 since 2015.
[1] Jennifer Ma and Matea Pender, “Trends in College Pricing and Student Aid 2023,” College Board, 2023, research.collegeboard.org/trends.