Mythbusters: 529 Plans
Myth or Fact #1: You can only contribute to a 529 plan sponsored by your home state.
Myth. U.S. residents can take advantage of 529 plans available in any state across the country. Though there sometimes can be benefits of contributing to your home state plan, more often than not, the out-of-state choice is much better from a total cost and ease of use standpoint. Even if your home state plan offers a tax incentive for participation, make sure you weigh all factors before making a final decision. Some factors to consider include the costs and types of investment vehicles available and the ability to set up online features, like automatic contributions from bank accounts.
At the time this blog was published, believe it or not, the Illinois Bright Start 529 Plan was considered among the best in the country, even for out-of-state consumers.
Myth or Fact #2: If you save in a 529 plan account, it will hurt the child’s financial aid prospects.
Fact. 529 plan assets will be considered by FAFSA, though they will not have as big an impact as you might think. 529 plan assets are technically considered the assets of the parent, not the child. Because they are considered assets of the parent, they count for a smaller percentage of what FAFSA considers as assets eligible to pay for college costs. Even if the 529 plan accounts are established and owned by the child, they still count for a smaller percentage of the FAFSA calculation than other non-529 plan assets (like UTMA/UGMA or other investment related accounts owned by minors).
Myth or Fact #3: If your child does not go to college, you will lose the money saved in a 529 plan.
Myth. If your child does not attend a four-year university, the money can also be used for certain eligible trade and technical schools (for degrees such as cosmetology, welding, or other two-year programs). If, in the event, the child does not attend any undergraduate programs, the funds can be withdrawn from the 529 plan. The fund earnings, however, will be subject to federal and state income taxes and a 10% withdrawal penalty.
If you’re curious on which institutions are 529 plan eligible, go here to search for institutions in your area.
Myth or Fact #4: 529 plan accounts can only be used to pay tuition costs.
Myth. 529 plans actually have a reasonable amount of flexibility in how the money can be used. The circumstances under which the accounts can be used are quite loosely defined by “qualified, college-related expenses.” Examples of when money can be used include tuition, textbooks, room and board (for at least half-time students), calculators or special software required by classes, and off-campus housing (with specific guidelines).
Some discretionary costs where 529 plan accounts generally cannot be used are intramural sport costs, costs for sororities/fraternities, fuel costs for commuters, and dorm mini-fridges or other appliances.
For other FAFSA related questions you may have, reference another blog written by Savant’s Mary Beth Drummond, located here.
Sources: Dispelling Myths about 529 Plans (Morningstar)