Although 529 plans have been around for more than 20 years, many parents are still confused about how they work and may hesitate to open a 529 plan because of these college savings myths. But, waiting to open a 529 plan will cost you. Parents who wait to start saving for college until their child enrolls in high school have to contribute six times more per month to reach the same college savings goal as parents who start saving at birth.
To get the most value from your 529 plan, the best time to get started is right now. Don’t let these common misconceptions keep you from maximizing your child’s college savings.
MYTH: Only a parent can be the account owner of a 529 plan
TRUTH: Grandparents, aunts, uncles, family friends and just about any U.S. citizen saving for a child’s education can open a 529 plan. Some 529 plans also allow resident aliens, minors, trusts and legal entities to be the 529 plan account owner. The financial aid treatment of a 529 plan, however, may depend on the account owner.
MYTH: A student can be listed as the beneficiary on only one 529 plan
TRUTH: A child may be listed as the beneficiary on an unlimited number of 529 plan accounts. In some cases, a grandparent or other relative may want to open an account in their own name, in addition to a contributing to a parent-owned account. In 10 states, only the 529 plan account owner is eligible for state income tax benefits.
Some parents contribute the maximum amount to an in-state 529 plan that will qualify for a state income tax benefit and contribute any additional savings to an out-of-state 529 plan with lower fees. Some parents use one 529 plan to save for college and a separate 529 plan to save for K-12 tuition.
MYTH: 529 plans are difficult to open and maintain
TRUTH: Individuals may open a 529 plan by completing an enrollment form on the 529 plan’s website or through a licensed financial advisor.
A financial advisor helps select and manage the investments in an advisor-sold 529 plan. Families who open a direct-sold 529 plan are responsible for the 529 plan’s investment selection and asset allocation. Investment decisions are easy because the number of investment options is limited. Moreover, most 529 plans offer investment options that automatically adjust based on the beneficiary’s age, so there is very little maintenance involved.
MYTH: You have to make a lot of specific investment decisions with a 529 plan
TRUTH: Most direct-sold 529 plans offer age-based investment options that automatically shift allocations as the beneficiary gets closer to college. Typically, the initial 529 plan asset allocation is heavily-weighted toward equities (stocks) and shifts toward more conservative fixed income options over time.
This “set it and forget it” method gives parents peace of mind that the level of risk in their 529 plan is appropriate for their child’s age.
MYTH: It costs a lot to open and maintain a 529 plan account
TRUTH: There are no enrollment or application fees to open a 529 plan. Some 529 plans have minimum initial and subsequent contribution requirements, but these are typically very low. Some 529 plans offer a lower contribution requirement when an automatic investment plan is selected.
MYTH: Low-income families cannot contribute to a 529 plan
Families who can only afford to contribute a small amount to a 529 plan will still benefit. Whether it’s a recurring $25 monthly contribution, or a lump sum whenever the child receives a monetary gift for a birthday or holiday, every dollar saved is a dollar less they will have to borrow in student loans.
MYTH: It's too late to open a 529 plan account
TRUTH: Even if your child is a high school senior there is still time to take advantage of 529 plan benefits. Families may continue to contribute to a 529 plan while their child is in college, giving the investment additional time to compound tax-free.
Eligible families may also take advantage of annual state income tax benefits for 529 plan contributions while their child is in high school and college. A state income tax benefit functions like a discount on tuition when contributions are immediately withdrawn to pay for college. State tax savings may also be reinvested to give the student’s college savings an extra boost.
MYTH: You have to save the full cost of college in a 529 plan
TRUTH: There is no requirement to save the full cost of college in a 529 plan. In fact, aiming to save one-third of projected future college costs is a smart rule of thumb. Families can cover the remaining two-thirds with current income, financial aid and student loans.
You can use a college savings calculator to estimate future college costs. Families who aren’t able to save one-third of college costs may want to consider a lower cost college, or try to fill the savings gap by using these strategies:
- Ask friends and family for 529 plan contributions instead of birthday and holiday gifts for your child
- Earn cash back rewards through Upromise
- Apply for financial aid and scholarships
- Take advantage of education tax credits