Demystifying the Myths of 529 College Savings Plans

When it comes to saving for education, 529 plans are a popular option, yet they are often misunderstood. Here, we dispel some common myths associated with these savings plans to provide clarity and insight.

Myth 1: 529 Plans Are Solely for College Tuition

One of the most pervasive myths is that 529 plans can only be used for college tuition. In reality, these plans are much more versatile.

Funds from a 529 plan can be used for a variety of qualified education expenses, including tuition, fees, books, and even room and board if the student is enrolled at least half-time1. Moreover, recent changes in legislation have expanded the use of 529 plans to include K-12 tuition expenses, up to a certain amount per year.

Myth 2: Only Parents Can Contribute to a 529 Plan

Another common misconception is that only parents can contribute to a 529 plan. This is not the case; anyone can make contributions to a 529 plan on behalf of a beneficiary. This includes grandparents, other relatives, and even friends.

There is also the option to change the plan’s beneficiary if necessary, providing flexibility in case the original beneficiary does not need the funds.

Myth 3: If You Don’t Go to College, You Lose the Money

Many people believe that if the beneficiary does not attend college, the money in a 529 plan is lost. This is not true. While it is correct that there is a 10% penalty on earnings for non-qualified withdrawals, the account owner can change the beneficiary to another family member who can use the funds for their education.

Alternatively, the funds can still be withdrawn for non-educational purposes, albeit with the penalty and income taxes applied to the earnings portion of the withdrawal.

Myth 4: 529 Plans Are Only for Wealthy Families

The belief that 529 plans are only for wealthy families is a significant barrier to many potential savers. However, 529 plans have no income limits, and anyone can contribute regardless of their income level.

Additionally, the minimum contribution amounts are typically quite low, making it an accessible option for families of all income brackets.

Myth 5: 529 Plans Negatively Affect Financial Aid Eligibility

A common concern is that having a 529 plan will negatively impact a student’s eligibility for financial aid. While it is true that 529 plans are considered when determining financial aid, they are treated as a parental asset if the parent is the account owner.

As such, they have a minimal impact on financial aid calculations compared to assets held directly in the student’s name.

Myth 6: There’s Only One Type of 529 Plan

There are actually two types of 529 plans: prepaid tuition plans and education savings plans.

Prepaid tuition plans allow families to lock in current tuition rates for future use at in-state public colleges, while education savings plans are investment accounts that can be used for a range of education expenses at various institutions.

Conclusion

Understanding the realities of 529 plans can empower families to make informed decisions about saving for education. By debunking these myths, we can see that 529 plans offer flexibility, tax advantages, and are accessible to a wide range of contributors and beneficiaries. With this knowledge, more families can utilize 529 plans to their full potential, ensuring that educational goals are within reach.

Disclosures

Bloomwood does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.

For additional information about Bloomwood, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.  

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.   

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Bloomwood is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Bloomwood and its representatives are properly licensed or exempt from licensure. 730 Starlight Lane, Atlanta, GA 30342.