529 college savings plan are to college savings what Roth IRAs are to retirement savings. You make after-tax contributions and qualified distributions in the future come out entirely tax free. All in all, it’s a great deal.
As great as these accounts are, however, there are a lot of misconceptions out there about exactly how they work. Earlier this week, I was catching up on some podcasts when I ran across one from Vanguard covering five such myths.
Here they are, along with a healthy dose of the truth about each one:
- Myth #1: 529 accounts are difficult to open and maintain. In reality, accounts can be opened online in just a few minutes. You’ll need the beneficiary’s birth date and SSN but, aside from that, it’s very easy. Also, because most plans offer age-based allocations, there’s no need to manage the investments on a daily basis.
- Myth #2: You can only use 529 assets for schools in the state that sponsors the plan. While 529 are all sponsored by individual states, you can use proceeds from them to cover eligible expenses at most 4 year colleges and universities, as many two years schools and technical colleges. The primary exception to this are pre-paid tuition plans, which are typically tied to a particular state.
- Myth #3: If your child doesn’t go to college, you’ll lose your assets. If the beneficiary doesn’t go to college, or if there is money left over when they’re done, you have two options. First, you can transfer the account another beneficiary (including yourself), or withdraw and pay taxes plus a 10% penalty. This latter option isn’t great, but it’s far better than losing your account balance.
- Myth #4: 529 investments dramatically reduce financial aid eligibility. While it’s true that parent-owned account are included in financial aid calculations, less than 6% of the money in these accounts is counted when filling out the FAFSA. The situation is even better for grandparent-owned accounts, which have no effect whatsoever on financial aid calculations.
- Myth #5: Only account owners can contribute to a 529 plan. While 529 college savings accounts can only have a single owner, anyone (family, friends, etc.) can contribute to the account on behalf of the beneficiary.
If you’re currently in the market for a 529 college savings plan, you might also be interested in the following articles from the archives:
- The Best 529 Plans â€“ 2009 Edition
- The Worst 529 Plans â€“ 2009 Edition
- The Best 529 Plans, Revisited
- The Three Best 529 Plans
Do you have a 529 account? If so, which one? And what do you like/dislike about it?