By Ashley Murdie
Communications and Financial Literacy Director
Kansas State Treasurer’s Office
October 27, 2014
Halloween is just around the corner, and while the fear of things that creep and crawl through the night may spook others, it’s 529 myths that truly have me worried. All too often, I’ve heard the same myths regarding 529 plans used as reasons by parents for not opening an account.
It costs too much to start a 529 account.
My child will have to attend an in-state school.
I’ll lose the money if my child doesn’t go to college
Knowing that these 529 myths and others still continue to deter families from using such a valuable resource is alarming, which is why I’ve made it a personal goal of mine to squash these pesky things. I’ve compiled a list of menacing myths below that I plan to debunk in hopes that parents no longer fear the use of 529 accounts in their efforts to save for their child’s education.
Reality: Many plans have minimums as low as $25 and no annual fees if you’re willing to contribute through payroll direct deposit or an automatic investment plan. To help families save more, some plans also offer matching grants, rewards programs, or gifting services that allow others to make gift contributions.
Myth 2: My child will have to attend an in-state college where the 529 account was purchased.
Reality: This myth has been around since the beginning of 529’s mostly because the plans are administered by states. The truth is 529 plans can be used at any accredited institution nationwide. Even prepaid plans, which are based on the cost of in-state tuition, have provisions for portability. In fact, assets can even be used at some universities abroad.
Myth 3: If my child doesn’t go to college, I’ll lose all the money in my account.
Reality: A 529 plan has a lot of flexibility. First, if your child decides not to attend college, you can transfer the assets of the account to a sibling, yourself, or another family member with no tax penalty. Alternatively, you can also choose to withdraw the assets as a non-qualified withdrawal, but you’ll have to pay income tax and a 10 percent tax penalty on earnings in the account. Furthermore, if your child receives a full scholarship, the 10 percent penalty is waived. Don’t let the fear of saving too much be your excuse for not getting started.
Myth 4: We won’t be able to send our child to a four-year university, so a 529 account is not right for us.
Reality: Assets in a 529 account are not just for public and private four-year colleges and universities. They can also be used at trade schools, community colleges, and technical schools. Bottom line: Any postsecondary educational institution that qualifies to participate in a student aid program administered by the U.S. Department of Education is an eligible institution.
Myth 5: Having a 529 savings plan will reduce my child’s financial aid package.
Reality: 529 plan assets have a relatively smaller effect on federal financial aid eligibility than most people believe. If owned by the parent for the benefit of a child, 529 accounts are only assessed at a 5.64% rate when determining your child’s Expected Family Contribution. That’s far less impact on federal financial aid eligibility than student owned savings, CDs or investments.
Myth 6: My child is in high school. It’s too late to begin saving now.
Reality: It’s never too late. Even if your student is in high school or you’re planning to enroll in classes soon, you can still take advantage of the tax benefits of a 529 plan. Additionally, the more you manage to save now, the less you’ll have to borrow later. 529 plans do offer low risk investment options for short term investors.
Now that these six myths have been cleared up, I hope I’ve helped eliminate some reservations people may have when considering a 529 plan. There are many advantages to owning a 529 account to include tax incentives, flexible investment options and more. Please don’t let these 529 myths spook you this Halloween season. Instead, leave that to the creepy crawling things in the night.
About the author:
Ashley Murdie is the Communications and Financial Literacy Director for the Kansas State Treasurer’s Office, which administers the Learning Quest 529 Education Savings Program. Since beginning 13 years ago, the Learning Quest 529 program has grown to include more than 186,000 accounts and over $4.5 billion in assets. Visit learningquest.com or call 1-800-579-2203 today to open an account.