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Busting Myths about 529 College Savings Plans Thumbnail

Busting Myths about 529 College Savings Plans

Starting to save for college when kids are young offers the advantage of a long time horizon.  One great solution is a 529 College Savings Account.  These investment accounts offer special tax advantages for funds put aside for education. The earnings grow tax-free and qualified withdrawals are free from federal and state income taxes. Additionally, there are no income limits or contribution minimums.

However, not enough savers take advantage of 529 Plans because of some common misconceptions. Let’s bust some of those myths!

Myth #1: Funds in a 529 Plan can only be used for in-state college tuition. 

Funds can be used at eligible schools across the United States, including public and private colleges and universities, vocational, trade, technical and professional institutions. Some foreign schools are eligible as well. Qualified expenses include tuition, school fees, books, supplies, room and board, and computer equipment for the student. 

As a result of the 2017 Tax Cuts and Jobs Act, funds from 529 Plan Accounts can be used for private elementary and high school tuition. Each year up to $10,000 can be used for primary or secondary education. 

Myth #2: Only parents can open 529 Accounts and make contributions for their own children.

Account owners can be parents, grandparents, other family members, friends and even trusts. Each account can have only a single beneficiary, but it can be any U.S. citizen or resident alien with a Social Security Number or Individual Taxpayer Identification Number.  Anyone can contribute to an open account, regardless of who owns the account. Relatives or even friends can help a child save for college.

Myth #3: If my child decides not to go to college or receives a full scholarship, the money saved in the 529 Plan Account will be “wasted.”

If the account beneficiary does not use all of the funds—for any reason—the account owner can name another family member as the beneficiary or use the money for their own continuing education expenses. The account also can be retained for a future grandchild to use. 

If the account owner decides to withdraw an unused balance, the contributions are not taxed or penalized. Only the earnings portion of the account is subject to income taxes and a 10% penalty.  

If your child does receive a scholarship, you may withdraw the amount of the scholarship from the plan and use these funds for anything without incurring a penalty, though you must pay taxes on the earnings.

Myth #4: My child won’t qualify for financial aid if they have a 529 Plan Account. 

Parent-owned 529 Accounts receive favorable treatment during the federal financial aid process. Usually, 20% of student-owned assets are considered available to pay for college in the financial aid calculations. Funds saved in a 529 Plan Account are considered parent-owned assets and only up to 5.6% of the account assets are included in the Expected Family Contribution for financial aid purposes.  

Myth #5: UTMA custodial accounts are pretty much the same as 529 Plan Accounts.  

A Uniform Transfers to Minors Act (UTMA) custodial account is used to hold assets for a minor child and must be turned over to the child when they reach legal age, usually 21 years old. Contributions to the account are considered irrevocable gifts - meaning the funds must be used for the child's benefit and cannot be withdrawn or used for other purposes. 

There are some key differences between a custodial account and a 529 Plan Account: 

Control of the account

When the minor reaches legal age (21 in Illinois), all of the assets in the UTMA custodial account become property of the beneficiary – who may choose not to spend money on tuition as intended.  Ownership of 529 Plan Accounts does not change. 


Interest, dividends and capital gains (earnings) incurred annually in the UTMA custodial account are all taxable to the minor. In 529 Plan Accounts,  earnings grow free from federal and state income taxes and withdrawals for qualified education expenses are not taxed – providing a distinct advantage. Additionally, many states offer benefits for residents that contribute to in-state 529 plans.  In Illinois, taxpayers can deduct 529 contributions up to $10,000 per individual or $20,000 for married couples filing jointly. 

Do you still have questions about 529 Plan Accounts and if they are the right fit for your college savings plan? Please connect with us.

The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only.  Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.