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Six must-know 529 plan rules
http://www.savingforcollege.com/articles/six-must-know-529-plan-rules-753

Updated: 2015-09-17

by Kathryn Flynn

A 529 college savings plan is an investment account where your money grows tax-free if its used to pay for college. Unlike other savings vehicles, there are no annual contribution limits and no income limits. 529 plans have enjoyed their time in the limelight this year, after President Obama suggested removing their federal tax benefits. Yet even with all of the publicity, many families are still confused about how 529 plans operate. In this years Annual College Savings Survey, we presented six true or false questions about 529 rules to visitors of Savingforcollege.com. Click through the slideshow to see where the biggest misconceptions lie!

1. I must use the 529 plan offered by my state of residence - FALSE

  • 20% of total respondents answered incorrectly
  • 18% of grandparents and 21% of parents answered incorrectly
  • You can enroll in almost any states 529 plan, no matter where you live, but your home state many offer a state tax benefits for residents.

RELATED: How much is your state's tax deduction really worth?

2. If my child doesnt go to college, Ill lose the money I have saved in my 529 plan FALSE

  • 17% of total respondents answered incorrectly
  • 10% of grandparents and 18% of parents answered incorrectly
  • If the beneficiary of a 529 account doesnt go to college, you can change the beneficiary or take a non-qualified withdrawal.
  • If you take a non-qualified withdrawal, you will incur income tax as well as a 10% penalty tax on the earnings portion of the account. Youll never be taxed or penalized on the principal (the amount you deposited) since it was made with after-tax money.

Avoid these 529 withdrawal traps

3. 529 plan savings must be applied toward colleges in the state where the plan is based FALSE

  • 16% of total respondents answered incorrectly
  • 12% of grandparents and 17% of parents answered incorrectly
  • You can use your 529 savings to pay for almost any post-secondary education, including traditional four-year universities, community colleges, trade schools and even study abroad programs.

5 types of students who benefit from 529 plans

4. If my child gets a scholarship, Ill lose the money I have saved in a 529 plan FALSE

  • 9% of total respondents answered incorrectly
  • 5% of grandparents and 10% of parents answered incorrectly
  • If a student gets a scholarship, non-qualified 529 plan withdrawals up to the amount of the tax-free scholarship will not be subject to the 10% penalty. The earnings portion of the withdrawal, however, will incur income taxes.

5 secrets to winning a college scholarship

5. Savings in a 529 plan are considered when determining financial aid eligibility TRUE

  • 33% of total respondents answered incorrectly
  • 37% of grandparents and 32% of parents answered incorrectly
  • Funds saved in a 529 plan owned by a parent or student are considered parental assets. When determining a students Expected Family Contribution, a financial aid office will count up to 5.64% of parental assets as funds available to pay for college (compared to 20% of student assets).
  • Assets in a grandparent-owned 529 plan are not reported on the FAFSA, but when the grandparent makes a withdrawal to pay tuition the amount will be reported as student income on the following years FAFSA. Income is assessed at 50%. Withdrawals from parent- or student-owned 529 plans have no effect on financial aid.

15 facts about financial aid eligibility

6. My child can never withdraw from the 529 plan without my permission - TRUE

  • 37% of respondents answered incorrectly
  • 39% of grandparents and 37% of parents answered incorrectly
  • Unlike custodial accounts under UGMA/UTMA, the 529 plan account owner (not the beneficiary) retains control of the funds throughout the life of the account. The beneficiary has no legal rights to the assets, regardless of his or her age.

10 things we love most about 529 plans

A 529 college savings plan is an investment account where your money grows tax-free if its used to pay for college. Unlike other savings vehicles, there are no annual contribution limits and no income limits. 529 plans have enjoyed their time in the limelight this year, after President Obama suggested removing their federal tax benefits. Yet even with all of the publicity, many families are still confused about how 529 plans operate. In this years Annual College Savings Survey, we presented six true or false questions about 529 rules to visitors of Savingforcollege.com. Click through the slideshow to see where the biggest misconceptions lie!

1. I must use the 529 plan offered by my state of residence - FALSE

  • 20% of total respondents answered incorrectly
  • 18% of grandparents and 21% of parents answered incorrectly
  • You can enroll in almost any states 529 plan, no matter where you live, but your home state many offer a state tax benefits for residents.

RELATED: How much is your state's tax deduction really worth?

2. If my child doesnt go to college, Ill lose the money I have saved in my 529 plan FALSE

  • 17% of total respondents answered incorrectly
  • 10% of grandparents and 18% of parents answered incorrectly
  • If the beneficiary of a 529 account doesnt go to college, you can change the beneficiary or take a non-qualified withdrawal.
  • If you take a non-qualified withdrawal, you will incur income tax as well as a 10% penalty tax on the earnings portion of the account. Youll never be taxed or penalized on the principal (the amount you deposited) since it was made with after-tax money.

Avoid these 529 withdrawal traps

3. 529 plan savings must be applied toward colleges in the state where the plan is based FALSE

  • 16% of total respondents answered incorrectly
  • 12% of grandparents and 17% of parents answered incorrectly
  • You can use your 529 savings to pay for almost any post-secondary education, including traditional four-year universities, community colleges, trade schools and even study abroad programs.

5 types of students who benefit from 529 plans

4. If my child gets a scholarship, Ill lose the money I have saved in a 529 plan FALSE

  • 9% of total respondents answered incorrectly
  • 5% of grandparents and 10% of parents answered incorrectly
  • If a student gets a scholarship, non-qualified 529 plan withdrawals up to the amount of the tax-free scholarship will not be subject to the 10% penalty. The earnings portion of the withdrawal, however, will incur income taxes.

5 secrets to winning a college scholarship

5. Savings in a 529 plan are considered when determining financial aid eligibility TRUE

  • 33% of total respondents answered incorrectly
  • 37% of grandparents and 32% of parents answered incorrectly
  • Funds saved in a 529 plan owned by a parent or student are considered parental assets. When determining a students Expected Family Contribution, a financial aid office will count up to 5.64% of parental assets as funds available to pay for college (compared to 20% of student assets).
  • Assets in a grandparent-owned 529 plan are not reported on the FAFSA, but when the grandparent makes a withdrawal to pay tuition the amount will be reported as student income on the following years FAFSA. Income is assessed at 50%. Withdrawals from parent- or student-owned 529 plans have no effect on financial aid.

15 facts about financial aid eligibility

6. My child can never withdraw from the 529 plan without my permission - TRUE

  • 37% of respondents answered incorrectly
  • 39% of grandparents and 37% of parents answered incorrectly
  • Unlike custodial accounts under UGMA/UTMA, the 529 plan account owner (not the beneficiary) retains control of the funds throughout the life of the account. The beneficiary has no legal rights to the assets, regardless of his or her age.

10 things we love most about 529 plans

 

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