5 Myths Debunked for 529 Day

Even the savviest borrowers can feel nervous about appropriately planning for college expenses – especially with the plethora of recent changes from the current administration. Tuition costs climb higher and uncertainties continue to mount surrounding student loan forgiveness and income-driven repayment plans.

This unpredictability highlights the importance of planning early and diligently for educational costs. As with most financial undertakings, a prudent way to start preparing is to meet with your tax-intelligent Financial Professional or Financial Planner. They can help project the costs of college and guide you on how much to systematically save to reach your goal.

One of the first items on their agenda will likely be 529 plans. That’s because this tax-advantaged account can really help your savings stack up.

In honor of 529 Day, we’ve asked Avantax Senior Manager, Financial Planning Emily Millsap, CFP® CExP™ to debunk five 529 plan myths to help you better understand this tax-intelligent savings tool.

Myth: A 529 plan is useless if your child doesn’t decide to attend college.
Fact: You can roll over up to $35,000 of unused 529 plan balances into a Roth IRA for the benefit of your child’s future retirement savings. This is also helpful if your child does attend college but doesn’t end up needing all the money you set aside in the 529 plan.

Myth: 529 plans only help you save on federal taxes. 
Fact: Many states offer tax benefits for contributions. Some states offer tax credits whereas others offer deductions. For example, Indiana offers a 20% state income tax credit of up to $1,000 each year. New York offers an annual state income tax deduction of up to $5,000 for single filers or $10,000 for those who are married filing jointly. Be sure to speak with your Financial Professional about your state’s specific rules to best understand the potential tax benefits of a 529 plan.

Myth: Only a parent can open a 529 plan for their child.
Fact: Anyone over the age of 18 can set up a 529 plan and can name anyone as a beneficiary, whether they’re related to you or not. You can even set up a 529 plan with yourself as beneficiary for your education or student loan repayment purposes! 

Myth: You can only use a 529 plan in the state in which it was opened.
Fact: You can use the funds at any university, but you generally won't receive a state tax credit/deduction for contributing to an out-of-state 529 plan. For example, if you live in California but contribute to a 529 plan that was set up in Michigan, you will miss out on the associated tax deduction. However, if you reside in one of the nine tax parity states (Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, or Pennsylvania), your tax benefits won’t be restricted regardless of if the 529 plan is in-state or out-of-state.

Myth: Once you set up a beneficiary for a 529 plan, you can never change it.
Fact: You can change the beneficiary to an eligible family member of the original beneficiary at any time with no tax consequences. (spouse, children, stepchildren, parents, siblings, etc.). If you change the beneficiary to a non-eligible family member of the original beneficiary, you’ll incur a 10% federal penalty on earnings.

Now that you’re armed with the facts about 529 plans, set up a conversation with your tax-intelligent Financial Professional or Financial Planner to discuss potential next steps in your education savings journey.