6 things you may not know about 529 plans

A 529 plan can be confusing—do you know these important details?

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Key takeaways

  • There are no limits on who can open a 529 college savings plan or who can contribute.
  • 529 plan savings can cover a range of educational expenses, in addition to tuition.
  • Money saved in a 529 plan may have only a small impact on financial aid eligibility.

What you don't know could hurt you when it comes to saving for college—you could be missing out on benefits that could help you save. Many parents don't know how much college may cost, how 529 savings plans work, or how college savings affect financial aid, a new survey from Fidelity has found.1

We asked parents some questions to find out what is clear and what can be confusing about 529 college savings plans, and revealed 6 commonly held misconceptions.

True or false: Only parents can open a 529 college savings plan.

This is false. Anyone can open a 529 college savings account—and can even name themselves as beneficiary. More importantly, anyone can contribute to the account.

Many people could be missing out. Fidelity's survey found that:

  • 29% of people think only a child's parent can open a 529 plan.
  • One quarter (24%) believe only family members can contribute.

If you're swimming in toys and related ephemera from well-meaning gift-givers, consider asking for a contribution to a 529 plan instead. In fact, 84% of parents say they would welcome contributions to college savings in lieu of traditional holiday gifts from family and friends.2

True or false: Money in a 529 plan account can only be spent on tuition.

False. Money saved in a 529 plan account can be used for a variety of education-related expenses. But many parents are under the misconception that the money can only be used for specific costs: More than one third (36%) of parents in Fidelity's survey thought that 529 savings can only be used for tuition and fees.

In fact, funds in a 529 account can be used to cover far more than just tuition and fees—the funds in a 529 can also be used to pay for room and board, books and supplies, special services, and computers and related equipment.

To learn more, read Viewpoints on Fidelity.com: How to spend from a 529 college plan

True or false: I will lose the money if the beneficiary doesn't need all of it.

False. You can't lose unused money in a 529 plan.

Rest assured that money saved in a 529 account is still yours if the original beneficiary doesn't need it all. The money can still be used for post-secondary education, for another beneficiary—or even for yourself.

This is not common knowledge. Fidelity's survey found that:

  • 42% of parents don't realize you can change a 529 plan's beneficiary.
  • Nearly one third (31%) assume that if you don't spend all of the funds in your 529 plan, you lose the money.
  • More than half (51%) don’t know that if your child receives a scholarship and doesn’t need all of their 529 savings, the parent/account owner can withdraw an amount equivalent to the scholarship without penalty.
  • More than one third (38%) believe that once their child turns 18, the child controls the funds in their 529 plan.

Unlike a custodial account, the money belongs to the account owner—not the beneficiary. You can let the money remain invested in the account in anticipation of your child continuing on to graduate school or another post-secondary institution. You can also change the beneficiary to another qualified family member, such as younger siblings, nieces, nephews, or grandchildren. If you pursue one of these options, you'll want to rethink your investment strategy to reflect how soon the funds will be needed, so you can take appropriate advantage of the potential for growth over time.

Also, if your child earns a scholarship and there are leftover college savings in your account, you only pay income taxes on the earnings portion of the money you take out to offset the scholarship.

If holding onto the funds or changing the beneficiary is not an option, the money is still yours. You'll pay a 10% penalty and ordinary income taxes on the federal level on the earnings if you withdraw the money, but don't spend it on qualified higher education costs. There may also be state tax implications.

True or false: I can't change the investments after opening the account.

Over a quarter of parents in Fidelity's survey (27%) believe that you can never change your 529 plan investments after opening the account. False! Luckily, you do have options to adjust the investments in your 529 college savings plan portfolio, but there are some limits to be aware of.

Here's how it works in general:

Each 529 college savings plan offers a range of investment options, which might include age-based strategies; conservative, moderate, and aggressive portfolios; or even a mix of funds from which you can build your own portfolio. An age-based asset allocation strategy becomes more conservative over time by reducing its equity exposure as the fund's target date approaches. Typically, plans allow you to change your investment options twice each calendar year. You can also adjust your strategy when you change the beneficiary, and you can change the allocation for contributions that are made to an account in the future.

True or false: I can only pick the 529 plan offered by my state.

This is false, but evaluating your options can be a little confusing: There are many state-sponsored 529 plans. The differences between state plans include investment options, fees, and potential state-level tax deductions or credits. Some states offer residents state tax advantages or other benefits, which can be an important factor in choosing a plan.

Unfortunately, not all parents know that a state tax deduction or credit could be on the table.

  • 61% of parents don't know if their state 529 plan offers an additional state tax deduction or credit.
  • More than half (53%) say they'd be likely to save more for college if their state did offer a tax deduction or credit.

You can open a 529 plan account in any state, but consider your own state plan first as it may offer additional tax benefits, or other perks like financial aid, scholarship funds, and protection from creditors.

Plus, some 529 plans may charge a fee to nonresidents. It's a good idea to consider all of the costs involved when choosing investments.

Read more: Compare all 529 plans by state

True or false: Saving in a 529 plan account could severely limit financial aid.

This is false, and this misconception can be particularly harmful if it keeps parents from saving. While it's true that 529 assets do affect financial aid, it's a potentially small impact: Parent-owned 529 plan assets are considered a parental asset and are factored into federal financial aid formulas at a maximum rate of only 5.6%.

  • 44% of parents think how much they've saved for college will impede their eligibility for financial aid.
  • Nearly all the parents surveyed (98%) either overestimated or couldn't answer how much of their total 529 savings .they would be expected to contribute per year of college

Read Viewpoints on Fidelity.com: 3 "must-know" college financial aid tips

Parents may underestimate college costs

College costs are increasing at a higher rate than inflation and it can be hard for parents to know how much money they will need for their children's education. Nearly half (45%) of parents admit they do not have a good idea regarding exactly how much they should be saving each month.

Many parents underestimate how much college will cost by the time their child is ready to head to campus.

Estimating college costs

  What parents estimate 1 year of college will cost when their child goes to college Average projected sticker price for 1 year of college
Parents of kids in high school (average, assuming projected costs for students starting college in 1–4 years) Public: $19,000 
Private: $36,000
Public: $34,000–$37,000 
Private: $52,000–$57,000
Parents of kids preschool and younger (average, assuming projected costs in 14–18 years) Public: $28,000 
Private: $49,000
Public: $50,000–$56,000 
Private: $76,000–$109,000
Source: The College Board, Trends in College Pricing 2016, October 2016. Estimates assume the cost of college is growing at 2.98% each year. A straight average of total charges (tuition, fees, room and board) for a combination of public and private four-year colleges was used for this calculation. Note that total expenses include books, supplies, transportation and other costs.

If you feel confused about your college savings options, consider reaching out to a financial professional. It could boost your confidence about how much and where you're saving for college.

In Fidelity's survey, 49% of parents saving for college were working with an advisor. Parents with an advisor had saved significantly more than those without, on average $34,000 versus $20,000. The median amount saved was $13,000 versus $6,000.

Only 30% of parents with children in preschool or younger work with an advisor. Just like saving for retirement, the sooner you start saving, the better the chance you'll hit your savings goal.

Next steps to consider

Open a flexible, tax-advantaged 529 college savings plan.

Confirm if you're on track with our college savings calculator.

Learn how college savings plans work, including tax savings.

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1. Fidelity Investments College IQ Survey. As part of the study, Fidelity conducted a survey of parents with college-bound children of all ages. Parents provided data on their current and projected household asset levels including college savings, use of an investment advisor and general expectations and attitudes toward financing their children’s college education. Data was collected by Boston Research Technologies, an independent research firm, through an online survey from July 26 – August 22, 2017, of 1,984 parents nationwide with children aged 18 and younger who are expected to attend college. The survey respondents had household incomes of $30,000 a year or more, and were the financial decision makers in their household. College costs were sourced from the College Board’s Trends in College Pricing 2016. The results of the Fidelity College Savings IQ may not be representative of all parents and students meeting the same criteria as those surveyed for this study.
2. Fidelity Investments 2016 Holiday Gifting Snapshot
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