Common Misconceptions About 529 Plans

A college education is often one of the biggest investments a family will ever make, but awareness and misconceptions about 529 plans can hold them back from saving for education costs.

529 plans allow families and individuals to set aside money for educational expenses in a tax-advantaged account. But prospective students and their families may not realize the option even exists.

“You have to be aware of a program in order to use it,” Theodore Miller, executive director of the New Mexico Education Trust Board, wrote in an email. “Surveys indicate that only about 30% of families nationwide are aware of what a 529 plan is, and especially what it does.”

In addition to awareness, families may have certain misconceptions about 529 plans, such as confusion around residency and contribution requirements or about ownership and what is considered a qualified expense.

Here are a few common misconceptions about 529 plans:

— 529 plans are only for children’s college costs.

— Families need to contribute a certain amount.

— Gift tax doesn’t factor into contributions.

— There are no contribution limits to 529s.

— 529 account ownership doesn’t matter.

— Families can only open a 529 in the state in which they reside.

Myth: 529 Plans Are Only for Children’s College Costs

Families can never start saving for a child’s college education too early. Small monthly investments early on can make a big difference 18 years down the line, so experts encourage families to start as soon as possible.

But 529 plans aren’t just for young children. Individuals can open and save with a 529 plan for their own college or graduate school expenses, naming themselves as both owner and beneficiary on the account. And in recent years, the uses of 529 plan funds have broadened.

[Read: What to Know About Paying Student Loans With 529 Plan Funds.]

“Just about a year and a half ago, the SECURE Act went through Congress and expanded the scope of the 529 plan to be used for apprenticeship programs and the repayment of student loan debt,” says Julio Martinez, executive director of the ScholarShare 529 Investment Board in California. “Those are the kinds of things the industry is continuing to strive for, and 529 plans are trying to make it easier and more flexible and more versatile for families to participate in.”

Families can also use 529 funds for K-12 private school costs and college costs at both four-year institutions and community colleges.

Myth: Families Need to Contribute a Certain Amount

There are no requirements to contribute a certain amount in most 529 options, and no income requirements for families contributing.

[READ: Saving for College During Coronavirus: Managing Your 529 Plan.]

For example, at ScholarShare 529, Martinez says, “All you need is $1 to open the account, you don’t have to contribute after that.”

Families can contribute as much or as little as they are able over time.

Myth: Gift Tax Doesn’t Factor Into Contributions

Families should be aware of possible gift tax consequences when it comes to funding a 529 account.

In 2021, a single person can give up to $15,000 per person, per beneficiary to a 529, equating to $30,000 for a married couple. But Tracy Green, a planning and life-events specialist at Wells Fargo Advisors, also notes that families have the option to provide more funds upfront without gift tax consequences by using the five-year front-load rule.

“This allows gifts up to five times the annual exclusion amount in one year ($75,000 for single or $150,000 for married couple) as long as no other gifts are made during that 5-year period unless the annual gift exclusion increases and the gift tax form 709 is completed,” Green wrote in an email.

Myth: There are No Contribution Limits to 529s

There are limits to the amount a family can contribute beyond the gift tax limitations. These limits will vary by vendor, Green says.

“Families should keep in mind there are maximum vendor contribution limits for 529 plans which are different than the annual gifting limits,” she says. “If multiple 529 plans are opened by parents, grandparents, etc., they will want to keep family members in the loop when making contributions to these plans to avoid overfunding.”

Myth: 529 Account Ownership Doesn’t Matter

When it comes to ownership, there may be negative financial aid consequences for families that choose to put ownership in a child’s name.

The Free Application for Federal Student Aid, or FAFSA, will consider funds held in 529 accounts in determining a student’s aid eligibility, and assets may be more harshly considered if they are owned by the student.

There may also be certain tax consequences based on account ownership.

“Federally, anyone with a social security number or tax identification number may be the owner of a 529 plan,” Green says. “However, for state tax purposes account ownership could make a difference whether or not someone gets a state tax deduction or credit since some states only offer those to account owners and not contributors.”

[Read How Investors Can Best Use a 529 Plan.]

Myth: Families Can Only Open a 529 in the State in Which They Reside

Luckily, most 529 plans allow families to participate from out of state. This means it may be a smart move to shop around and find the best fit before committing to a plan.

Funds in these educational savings accounts can be used for colleges outside a student’s state of residence as well.

“Nearly all states permit out of state residents to use their 529 plans,” Miller says. “529 plans can be used for schools nationwide and even some international schools. The only requirement is that these schools are permitted to participate in federal student aid programs.”

Avoiding this and other misconceptions can help families make the best choice for their circumstances. Though the contribution limitations and qualified expense rules associated with 529 plans can seem intimidating, there is some flexibility.

“You can always change the beneficiary of the account,” Miller says. In cases where students don’t need the money because they received a scholarship, he says, “If that won’t work, you can take a distribution from the 529 plan equal to the amount of the scholarship. All you will pay is regular income tax on the earnings. There is no penalty in this case.”

More from U.S. News

How to Choose a 529 Plan on Your Own

4 Questions to Weigh Before Opening a 529 Plan

How to Select Mutual Funds Within 529 Plans

Common Misconceptions About 529 Plans originally appeared on

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