10 Top Misconceptions About 529 Plans

If you're confused about 529 plans, you're not alone. The often perplexing plans frequently stymie families, causing them to turn away, or leave them with false notions on their advantages and disadvantages. "They (529 plans) are not as well explained as maybe some other investments," says Stacy Francis, a Certified Financial Planner and owner of New York-based Francis Financial. Causing further confusion is the variety of plans, investment options and special rules. Our experts identified the concepts most frequently mistaken and spell out why they're wrong: If I open a state 529 plan, I will receive in-state tax benefits. That's not always the case, says Francis, who has had to break the news to many clients that they did not create a tax deduction just by opening a plan in their home state. In fact, only 30 states offer such a tax deduction. Even if the plans include that incentive, you may not quality for it, due to factors such as your adjusted gross income, says Wes Moss, a certified financial planner and chief investment strategist at Atlanta-based Capital Investment Advisors. I can't get the money if I don't use it for college. There's a penalty of 10 percent applied only to the earnings if you withdraw the money for non-education purposes, says Joe Hurley, founder of Savingforcollege.com. "You get your principal back without any tax and without any penalty." I thought my account could not go down in value. "You're investing, just like your 401(k) and stocks and bonds, and it can go down in value," says Hurley. Moss says some people think they're safer automatically because they're in a 529 plan -- especially if they don't keep up with an age-based portfolio that lowers the risk as the child approaches college age. "You think it's on autopilot, but the reality is you have to pay attention to it," says Moss. I can't contribute more than $13,000 per year. Some people are confused when they hear about a limit of $13,000 per beneficiary. But that's not the cap on 529 contributions -- it's for those who want to contribute to 529 plans without being required to file a gift-tax return. Plans carry their own maximum contribution caps, which are usually $300,000 or more, Hurley says. People also can contribute five years' worth of that gift tax limit at once -- up to $65,000 in a beneficiaries' fund in one year. I will be locked into my investment choice. In 2009, the investments can be changed twice a year through a special rule of the IRS. But, typically, you are allowed to roll over to a different 529 plan once every 12 months. Hurley adds that you can change the account beneficiary at any time, which also allows you to change the investment mix or move to a different 529 plan. I can only choose from the plans offered in the state where I reside. Look beyond what's offered by your state. Sometimes people don't realize that because they hear about the potential tax benefits, so they think they must go with their state's plan, Moss says. Hurley notes that only a handful of states don't accept nonresidents into their direct 529 plan. The 529 savings only work if my child attends a state school. This misconception could stem from the fact that another college finance option -- a prepaid tuition plan -- is for in-state education. But the money invested in college savings plans can be used for any eligible institution -- private or public, graduate or undergraduate, and even foreign schools, Hurley says. The money also could be used for vocational and other training with accredited schools. "You can become a pilot. You can become a chef. It can be used for things other than for college," Francis says. My child may lose out on other financial aid if we have a 529 account. For federal financial aid, 529 savings are considered parental assets. Parental assets are assessed in the formula at a much lower rate, 5.64 percent, than student assets in determining the student's Expected Family Contribution, or EFC. For more details, visit Savingforcollege.com's story on 529s and financial aid. "People think it's dangerous to save in the 529 because you're going to get less financial aid," Moss says. "Really, the opposite is true. Not saving is the greater risk." I will have to file a separate set of income tax returns in the state where I have a 529 account. Holders of plans do not have to file tax returns if they don't live in that state, Hurley says. If my child doesn't use it, we're going to lose it. The funds can be used by siblings, parents, grandparents and other relatives, including nieces and nephews. "There's so much flexibility in changing the beneficiary," says Moss, host of "Money Matters" on WSB radio in Atlanta. "They think that if they have one child that doesn't use it, they can't move it to the next child. Ultimately, you can use it as a parent for yourself if you want to go back and get any sort of education." Posted October 16, 2009 If you're confused about 529 plans, you're not alone. The often perplexing plans frequently stymie families, causing them to turn away, or leave them with false notions on their advantages and disadvantages. "They (529 plans) are not as well explained as maybe some other investments," says Stacy Francis, a Certified Financial Planner and owner of New York-based Francis Financial. Causing further confusion is the variety of plans, investment options and special rules. Our experts identified the concepts most frequently mistaken and spell out why they're wrong: If I open a state 529 plan, I will receive in-state tax benefits. That's not always the case, says Francis, who has had to break the news to many clients that they did not create a tax deduction just by opening a plan in their home state. In fact, only 30 states offer such a tax deduction. Even if the plans include that incentive, you may not quality for it, due to factors such as your adjusted gross income, says Wes Moss, a certified financial planner and chief investment strategist at Atlanta-based Capital Investment Advisors. I can't get the money if I don't use it for college. There's a penalty of 10 percent applied only to the earnings if you withdraw the money for non-education purposes, says Joe Hurley, founder of Savingforcollege.com. "You get your principal back without any tax and without any penalty." I thought my account could not go down in value. "You're investing, just like your 401(k) and stocks and bonds, and it can go down in value," says Hurley. Moss says some people think they're safer automatically because they're in a 529 plan -- especially if they don't keep up with an age-based portfolio that lowers the risk as the child approaches college age. "You think it's on autopilot, but the reality is you have to pay attention to it," says Moss. I can't contribute more than $13,000 per year. Some people are confused when they hear about a limit of $13,000 per beneficiary. But that's not the cap on 529 contributions -- it's for those who want to contribute to 529 plans without being required to file a gift-tax return. Plans carry their own maximum contribution caps, which are usually $300,000 or more, Hurley says. People also can contribute five years' worth of that gift tax limit at once -- up to $65,000 in a beneficiaries' fund in one year. I will be locked into my investment choice. In 2009, the investments can be changed twice a year through a special rule of the IRS. But, typically, you are allowed to roll over to a different 529 plan once every 12 months. Hurley adds that you can change the account beneficiary at any time, which also allows you to change the investment mix or move to a different 529 plan. I can only choose from the plans offered in the state where I reside. Look beyond what's offered by your state. Sometimes people don't realize that because they hear about the potential tax benefits, so they think they must go with their state's plan, Moss says. Hurley notes that only a handful of states don't accept nonresidents into their direct 529 plan. The 529 savings only work if my child attends a state school. This misconception could stem from the fact that another college finance option -- a prepaid tuition plan -- is for in-state education. But the money invested in college savings plans can be used for any eligible institution -- private or public, graduate or undergraduate, and even foreign schools, Hurley says. The money also could be used for vocational and other training with accredited schools. "You can become a pilot. You can become a chef. It can be used for things other than for college," Francis says. My child may lose out on other financial aid if we have a 529 account. For federal financial aid, 529 savings are considered parental assets. Parental assets are assessed in the formula at a much lower rate, 5.64 percent, than student assets in determining the student's Expected Family Contribution, or EFC. For more details, visit Savingforcollege.com's story on 529s and financial aid. "People think it's dangerous to save in the 529 because you're going to get less financial aid," Moss says. "Really, the opposite is true. Not saving is the greater risk." I will have to file a separate set of income tax returns in the state where I have a 529 account. Holders of plans do not have to file tax returns if they don't live in that state, Hurley says. If my child doesn't use it, we're going to lose it. The funds can be used by siblings, parents, grandparents and other relatives, including nieces and nephews. "There's so much flexibility in changing the beneficiary," says Moss, host of "Money Matters" on WSB radio in Atlanta. "They think that if they have one child that doesn't use it, they can't move it to the next child. Ultimately, you can use it as a parent for yourself if you want to go back and get any sort of education." Posted October 16, 2009