A Quick Guide to 529 Plans and College Savings: Dispelling Common Myths and Misconceptions

529 plans are a tool for those looking to save for college for their children, grandchildren, or any family member. While most people know that they are one of the most popular saving methods for college, many myths surrounding these plans may make you hesitant to open one. So, in honor of 529 College Savings Day, let’s dispel some of the most common myths associated with these plans.

Myth #1: 529 Plans Have Income Restrictions

While some college savings plans have income limitations to receive federal tax benefits, you can receive federal tax benefits for a 529 plan regardless of your income bracket. Your tax-free qualified withdrawals may be more valuable if you are in a higher income bracket with a 529 plan.

Myth #2: Only a Parent May Open Up a 529 Account

There is no restriction stating that only a parent of a child may open up an account on a student’s behalf. Grandparents, friends, aunts, uncles, etc., may open an account, as the student is the beneficiary. A parent may also open an account and invite other family members to contribute.

Myth #3: Money is Lost if Your Child Doesn’t Go to College

If your child decides not to continue their schooling, then it does not mean that the funds are lost. You may change the beneficiary to another family member or make a non-qualified withdrawal. When making a non-qualified withdrawal, the earnings are subject to federal and state income tax and a 10% federal tax to recoup the tax deduction for when the money was contributed to the account. You can transfer up to a lifetime limit of $35,000 from a 529 plan to a Roth IRA, provided the account has been open for at least 15 years. You can also pay down the principal or interest on qualified student loans for the beneficiary or their sibling.

Myth #4: Having College Savings Affects Financial Aid

Financial aid views the 529 plan as the parent’s asset, not the student’s, so it may only have a minimal impact when determining eligibility for financial aid, reducing it by no more than 5.64% of the plan’s account value. If the account is under a grandparent-owned 529 plans are not reported as assets on the FAFSA, nor are distributions counted as untaxed student income.

Myth #5: Money in a 529 Plan May Only Be Used for Tuition

There are several qualified expenses that 529 plan funds may pay for aside from tuition, such as books, supplies, certain software, computers and some related equipment, internet access, and qualified expenses and fees for room and board (for at least half-time students), and up to $10,000 for student loan repayment.

Myth #6: If Your Kid Is In High School, It’s Too Late to Start a 529 Plan

While your 529 plan account may have longer to grow the earlier you start, you may benefit from opening one anytime. Since the earnings are automatically reinvested, the contributions to a 529 plan still have some time to grow, even if the account is not started until your child is in high school.

Questions about 529 plans?

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Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Prior to investing in a 529 Plan investors 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 qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.  Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

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