There may be more to know about 529 savings plan accounts than you thought.
Fidelity Viewpoints
Key takeaways
- The requirements to open a 529 savings account are simple. You must be a US resident, at least 18-years old, and have a Social Security or tax ID number.
- 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.
A 529 savings plan is a tax-advantaged account designed to help pay for education. Here’s how it works: Any money saved in the account goes in after tax. You choose from a selection of pre-set investment mixes to find one that best matches your risk tolerance and time frame. Many plans offer age-based options that automatically become more conservative as your child nears college.
Your investments can then grow tax-deferred over time. When you're ready to start paying for school, withdrawals are federal income tax-free when used for qualified education expenses.
Take the quiz to see if you know these important 529 plan facts.
True or false: Saving in a 529 plan account could severely limit financial aid
False. Parent-owned 529 plan assets are considered a parental asset and are factored into federal financial aid formulas at a maximum rate of 5.6%.
This means that up to 5.6% of the 529 assets are included in the Student Aid Index (SAI) that's calculated during the federal financial aid process. As a point of comparison, student-owned assets are assessed at rates as high as 20%.
True or false: I will lose the money if my child doesn't go to college, or gets a scholarship and doesn't need all the money
False. You don't lose unused money in a 529 plan. The money can still be used for post-secondary education, for another beneficiary who is a qualified family member such as younger siblings, nieces, nephews, or grandchildren, or even for yourself.
You can withdraw the amount of any scholarship awards from your 529 without penalty; federal and state income taxes on the earnings still apply. If you need to take a withdrawal for expenses not related to education, you may owe taxes on the earnings withdrawn as well as a 10% penalty. Distributions from 529s are made up of contributions and earnings in proportion to their levels in the account. That means the portion of the withdrawal that's made up of your contributions would be tax-free and penalty-free, but the earnings portion would be subject to taxes and the 10% penalty.
Additionally, beginning January 1, 2024, the IRS permits 529-to-Roth IRA transfers under certain conditions.1
True or false: I can pick a 529 plan offered by any state
True. You can invest in a plan offered by any state, or your own. Consider your own state plan first, as some states offer residents state tax advantages or other perks like financial aid, scholarship funds, and protection from creditors. The differences between state plans include investment managers and choices, fees, and potential state-level tax deductions or credits.
True or false: Money in a 529 plan account can be used for elementary school tuition
True. You can use up to $10,000 from a 529 account each year per beneficiary on elementary, middle, or high school tuition. At the post-secondary level, money saved in a 529 plan account can be used for a variety of higher-education-related expenses: tuition and fees, room and board, books and supplies, and computers and related equipment.
True or false: Only parents can open a 529 college savings account
False. You don’t have to be related to the beneficiary on the account in order to open a 529 account for them. Friends or family members can open a 529 college savings account regardless of their income or relationship to the student—and can even name themselves as the student beneficiary on the account. More importantly, anyone can contribute.
Invite grandparents, uncles, aunts, and friends! Keep in mind that if a family member other than the parent opens a 529 account for the student, the student’s financial aid eligibility may be affected depending on when the 529 funds are used.
True or false: I can't save enough to make a difference
False. Consistently saving small amounts can add up over time. Time is an important factor in saving success2, thanks to compounding. As your investments earn a return, those returns are reinvested and have the potential to earn returns of their own.
You can also ask friends and family to make gifts to your child's college savings account instead of new toys at birthdays and holidays. Those extra contributions can help boost your saving efforts. Every little bit helps and every dollar saved is potentially one less dollar that may need to be borrowed.
Save and invest for college
Open a flexible, tax-advantaged 529 college savings plan.
More to explore
Transfers from a 529 account
You have options when it's time to pay college expenses.
529 plan FAQs
Have more questions about paying for college? Find answers here.
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