Debunking 529 Myths

Let's Separate the 529 Facts From the Fiction

All the myths swirling around 529 plans can prevent families from taking advantage of the great benefits that come with a 529. We debunk eight of the most common myths for you here.

Myth 1: "If my child doesn't go to college, I'll lose all of the money."

If your beneficiary doesn't go to college for whatever reason, you have several options:

There is no time limit on your 529 account, so you can use your funds at a later date if your beneficiary changes their mind, whatever their age.

You can change the beneficiary to an eligible family member with no taxes or penalties. The new beneficiary must be a relative of the previous beneficiary as defined by the IRS. A family member includes the following relatives of the beneficiary:

  • Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
  • Brother, sister, stepbrother, or stepsister
  • Father, mother, or ancestor of either
  • Stepfather or stepmother
  • Niece or nephew
  • Aunt or uncle
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
  • The spouse of the beneficiary or any individual listed above
  • First cousin

You can also request a nonqualified distribution. In this case, you would have to pay income taxes and a 10% federal tax on any earnings, and taxes may be assessed on the contributions if they were deducted from state income taxes in the past.

Your 529 plan can also be used tax-free to pay for qualified educational expenses at K–12 public, private, and religious schools¹; at certain eligible vocational schools and apprenticeship programs; and for education loan repayment for beneficiary or their siblings.

Myth 2: "If my child gets a scholarship, I'll lose the money."

If the beneficiary receives a scholarship, or if the cost of attendance is lower than expected, there are several options available:

  • 529 plans can be used to pay any qualified education-related expenses not covered by the scholarship, such as room and board, books, supplies, computer technology, and equipment.
  • Transfer any unused funds to an eligible family member.
  • Save the unused money for graduate school.
  • In the case of a scholarship, nonqualified withdrawals up to the amount of the tax-free scholarship can be taken penalty-free, but you’ll have to pay income tax on any earnings.

Myth 3: "If I save with a 529, my child won't be able to receive financial aid."

While the money you save with a 529 will be taken into consideration when determining what your child's financial aid will be, a 529 is considered a parental asset, not a student asset. A 529 plan owned by a custodial parent or dependent student typically counts as a parent's investment on the FAFSA, and it may reduce need-based aid by a maximum of 5.64% of the 529 account’s value. 

Although some of the aid you may get through the FAFSA could be grants, financial aid may also be offered in the form of loans, which must be repaid with interest.  Therefore, 529 account savings will offer the potential to reduce most families' dependence on student loans.

Myth 4: "Putting my money in a 529 plan restricts me from accessing it."

You will always have access to your money, for any reason, at any time. You can use your account balance, tax-free, for all approved uses beyond just college tuition. Or, should you need to utilize your funds for other life expenses, you have that option too. Nonqualified distributions may be subject to additional taxes and/or penalties, but you have that flexibility if you require the funds for expenses other than education.

Myth 5: "A 529 plan isn’t the best choice for me because you can only go to college in the state where you save, and you can only save in a 529 plan in the state where you live."

Your child or loved one can go to college in any state, regardless of which state's plan you're saving in. Your address doesn't dictate your child's college choice. You also don't have to save in your state's plan. Of course, your own state's plan may offer a state income tax deduction or other state benefits, which is a reason to review your state's plan as an option, but you can invest in any state's 529 plan.

Myth 6: "A 529 plan is only worthwhile if my kids go to a traditional four-year college."

A 529 plan can help you save for education regardless of where that education takes place. A 529 plan can help you save for four-year colleges, two-year colleges, graduate school, apprenticeships, vocational schools, technical schools, and even K–12 schools.¹ That makes 529 plans not only very efficient savings vehicles but also very flexible ones.

Myth 7: "A 529 plan can only be used to pay for tuition."

There are many more eligible uses for a 529 beyond just tuition.You can use your funds to pay for:

Related Fees

Room and 





Computer Technology

Keep in mind that many of these expenses aren't covered by scholarships. So even if your child is awarded scholarship money, you're likely going to need extra funds.

Myth 8: "There's no reason to open a 529 for each of my children. One is enough for the whole family."

You could use one college savings plan account for all your children, but it's likely not the best strategy. If your children have different time horizons, you may want to consider adopting different investment strategies for each of them. Therefore, opening an account for each child allows you to help them pursue their dreams according to their unique education timelines. There is no annual fee to open and maintain an account no matter how many accounts you open. For added flexibility, funds can be transferred between beneficiaries as needed.

Frequently Asked Questions

How and where can I use my 529 savings?


Your account balance can be used for any purpose. However, for the distributions to be federally tax-free, you have to...

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When can I take a distribution? 


You can take distributions from your account at any time. Distribution requests can be submitted online...

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