8 Common 529 Plan Misconceptions

A 529 college savings plan is a vehicle allowing families to save for college costs with tax-deferred earnings growth and tax-free distributions.  Additionally, many states offer a tax break for residents contributing to their plans. 

However, the rules about purchasing the plan and using the money can be difficult to digest, and there can be much confusion about how the plans operate.  Below are some of the common misconceptions:

1. You are limited to your home state’s plan. Many individuals believe they are limited to plans offered by their state of residence.  However, a buyer can select any state’s plan, but first look to see if your state offers tax benefits or reductions for residents.
2. Contribution limits equal those of your IRA. 529 plan contribution limits are set by the states and can be as high as $380,000.  To avoid gift tax consequences, federal law allows single taxpayers to contribute up to $14,000 in one year or make a lump-sum contribution of $70,000 to cover five years.  “It’s not limited to $5,500 if you’re under 50 like it is with an IRA.”
3. Your income is too high to contribute. Some investors confuse a 529 plan with a Coverdell Education Savings Account, which is only available to people with income below $110,000 for singles or $220,000 for those married filing jointly.  529 plans have no income limits.
4. The account must be in your child’s name. The donor, not the beneficiary is in charge of a 529 plan.  Thus, it is best to have the account with the parent listed as the owner or the trustee with the child as the beneficiary.
5. The money will be lost if your child does not go to college.  If the beneficiary does not use the money in the 529 plan for some reason, the assets can be transferred to another beneficiary.  A 529 plan is very flexible.
6. The money can only be used for a four-year college. Funds from a 529 plan can be used toward many postsecondary education programs, not just traditional colleges.
7. The beneficiary must be below a specific age. A 529 plan can be opened for a beneficiary of any age, and the funds can be distributed regardless of how old the beneficiary is when he or she attends college or graduate school.
8. It will hurt your child’s chance of getting financial aid. Although 529 plans will factor into the financial aid calculation, the benefits usually outweigh the drawbacks.

See Kate Stalter, 8 Common Misconceptions About 529 Plans, U.S. News & World Report, Nov. 24, 2014.