False. Assets can be returned to the 529 plan account owner as a non-qualified withdrawal. While the earnings will be subject to your ordinary income tax rates, the 10% federal penalty would be waived in this instance. Of course, as I noted above, you could change the beneficiary to another eligible family member.
7. 529 plan assets are factored in when determining financial aid eligibility.
True. 529 assets can affect needs-based aid, but the impact is not as significant as some other assets. 529 assets under parental control are assessed at a maximum rate of 5.64% in determining your family’s Expected Family Contribution (EFC) under the federal financial aid formula. In comparison, any investment assets in the student’s name (e.g., UTMA/UGMA accounts) are assessed at 20%.
8. Only parents can establish an account for a child.
False. Anyone can open an account for any beneficiary, child or adult. Many grandparents are choosing to open 529 accounts for their grandchildren, and this can be beneficial from a financial aid perspective since 0% of grandparents’ assets are factored into financial aid calculations.† Another tip: Some diligent planners and savers choose to open an account in their own name prior to having children to get a head start. They subsequently change the beneficiary designation once an heir is born. It is worth noting they will need to take gift taxes into account because they are changing beneficiaries across generational lines.
9. Sorry, only one plan per beneficiary.
False. A single beneficiary can have multiple accounts. This might mean two accounts in the parents’ name or one in a parent’s name and perhaps another in a grandparent’s name in a different state. This can be a useful tool for maximizing state tax benefits, where available. The amount that is eligible for a state tax deduction is subject to an annual cap, so you might want to contribute the max to a state plan first, then invest any excess in another favorite plan to diversify your exposure and spread your investment risk.
10. The child assumes control of the 529 account once he/she starts college.
False. The assets remain in the account holders’ control at all times. There is no age or circumstance under which the assets would automatically transfer to the beneficiary’s control. In fact, as noted above, the account owner can change beneficiaries at any time (e.g., if there are assets remaining in the account after the original beneficiary completes college, or if the intended beneficiary receives a scholarship and does not require the assets).
Whether you aced this quiz or not, my hope is that I might have dispelled some myths about 529 plans and inspired even one more parent to establish an account. As I pointed out in my previous post, Decoding the Real Cost of College, every dollar set aside for college pays off in a big way.
To me, it’s an easy decision. The harder one may be choosing among myriad 529 plan options. I encourage you to work with your financial advisor to identify a plan appropriate for your situation.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age. You can find more from Rob here.