Dispelling 529 plan myths

Here are some of the most common myths, and actual truths, about 529 college saving plans.

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If I don't use my 529 college savings plan savings for higher education, I lose the money.

Actually, the money is still yours, but you’ll pay both a 10% penalty and ordinary income taxes on the earnings if you don’t spend it on qualified higher education costs. To avoid these penalties, you could transfer the account to another beneficiary who plans to go to college. “Also, if a child gets a scholarship and you don’t need all the money for college, you pay only ordinary income taxes on the earnings portion of the money you take out to offset the scholarship, not the penalty,” says Keith Bernhardt, vice president of college planning at Fidelity Investments.

I can only invest in my own state’s plan.

Not true. Most plans have no state residency requirements for either the account owner or the beneficiary. Also, most plans have no restrictions on where (which state) you can go to college. It’s important to note, however, that some state plans have extra fees for nonresidents that you should consider before deciding to invest with that plan.

I can't contribute more than $14,000 a year to a 529 college savings plan account.

You can contribute up to the contribution limit set by the state overseeing the 529 plan you choose. This limit is based on the account balance. Most plans allow total assets in the account to exceed $300,000 before they stop allowing additional contributions. The $14,000 per year figure relates to gift taxes. Two parents could contribute $28,000 and not exceed the annual exclusion limit. You can actually make up to a $70,000 gift to one beneficiary and treat it as though the gift were made over five years (or $140,000 for two parents).1 Additional contributions could also come from friends and family (again, gift-tax limits should be considered). Consider talking with a tax adviser if you plan to make contributions exceeding $14,000 a year.

The federal tax benefits associated with a 529 college savings plan will eventually disappear.

The Pension Protection Act of 2006 indefinitely extended the federal tax-free qualified withdrawals on 529 college savings plan savings.

Once I choose a 529 college savings plan and its underlying investments, I am locked in and cannot make changes.

Actually, you are typically allowed to roll your 529 account savings over to another college savings plan. Additionally, you are allowed to change investments within your plan twice per calendar year or when you change beneficiaries.

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Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. Contact Fidelity for this and other information on any 529 college savings plan managed by Fidelity, call or write to Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest.
The UNIQUE College Investing Plan, U.Fund College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan are offered by the state of New Hampshire, MEFA, the state of Delaware and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona, resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.
Units of the Portfolios are municipal securities and may be subject to market volatility and fluctuation.
Investing involves risk, including risk of loss.
1. In order for an accelerated transfer to a 529 plan (for a given beneficiary) of $70,000 (or $140,000 combined for spouses who gift split) to result in no federal transfer tax and no use of any portion of the applicable federal transfer tax exemption and/or credit amounts, no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the five-year period, and the transfer must be reported as a series of five equal annual transfers on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the donor dies within the five-year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes.

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