4 Common 529 Plan Myths You Need to Know

Paying for college can be a daunting prospect considering today’s tuition costs. So you may be motivated to do your best to save for college while your children are young, and you may decide to use a 529 plan to fund their education.

But there is a lot of misinformation about this 529 plans there. If you have one of these accounts or are thinking about opening one, it’s important to get to the bottom of it. Here are four common 529 plan myths you shouldn’t believe.

Image source: Getty Images.

1. Your money can only be used for a four-year degree

You can absolutely use a 529 plan to pay for tuition at a four-year college. But that’s not the only option.

You can also use funds from a 529 plan to pay for a community college or cover the costs of a trade or vocational school. Additionally, you can use money from a 529 plan to pay tuition at a private K-12 school.

2. Your money can only be used to pay your tuition fees

The money in a 529 plan doesn’t have to be used solely for tuition to count as a qualified withdrawal. You can usually withdraw funds from a 529 plan to pay for educational supplies, such as computers and books, as well as college room and board. You can even use a 529 plan to pay off student loans up to $10,000.

3. You need to invest in your home state’s plan

Each state administers its own 529 plan, but that doesn’t mean you’re limited to the plan your state offers. You can absolutely contribute money to a 529 plan administered by a state you don’t live in.

That said, some 529 plans may have residency requirements, so it’s important to do your research. You should also know that some states offer tax benefits for 529 plan contributions, but you may have to invest in your home state’s plan to get these types of benefits.

4. You’ll be penalized if you don’t use your 529 plan for qualified education expenses

We have previously determined that 529 plan funds can be used for education-related expenses such as textbooks and supplies. But with the new rule, if you have a balance left in your 529 plan after paying all your education-related costs, you’re not necessarily stuck. This is because you can roll over up to $35,000 from a 529 plan to the plan Roth IRA without incurring the 10% penalty that would previously apply to this type of withdrawal.

If you’re transferring money from a 529 plan to a Roth IRA, there are rules to follow. First, you must have had a 529 plan for at least 15 years before transferring. Your rollover also cannot exceed the allowable Roth IRA contribution limit for the year.

In other words, if the IRS limit for Roth IRA contributions is $7,000, that’s all you can roll over in one year. But now there’s less pressure to spend your 529 plan on education costs because there’s a penalty-free rollover option.

Savings in a 529 plan can make college much cheaper once your children get there. This can also spare them the headache and financial blow of having to take out student loans. However, before jumping into the plans, it’s important to know how 529 plans work, so keep these basic rules in mind when funding your account.