6 Things You Need To Know About 529 Plans

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Key Takeaways

• 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 percent.
• You don't lose unused money in a 529 plan. You do have options if your child decides not to go to college or if they get a scholarship.
• Don't worry if you can't save a lot. Saving small amounts can add up over time.

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A 529 savings plan is a tax-advantaged account designed to help pay for education. Any money saved in the account goes in after tax, and then your investments can grow tax-deferred over time. When you're ready to start paying for school, withdrawals are tax-free when used for qualified education expenses. 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.

Take this pop quiz to see if you know these important 529 plan facts.

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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 percent. This means that up to 5.6 percent of the 529 assets are included in the Expected Family Contribution (EFC) that is calculated during the federal financial aid process. As a point of comparison—student-owned assets are assessed at rates as high as 20 percent.

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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 of it.

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 If you need to take a withdrawal for expenses not related to education, you may owe taxes on the earnings withdrawn as well as a 10 percent penalty. Distributions from 529s are made up of contributions and earnings in proportion to their levels in the account. That means that the portion of the withdrawal that is made up of your contributions would be tax-free and penalty-free but the earnings portion would be subject to taxes and the 10 percent penalty.

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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.

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True or false: Money in a 529 plan account can be used for elementary school tuition.

True. You can now use up to $10,000 from a 529 each year per child 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.

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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 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.

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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 success 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.

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Learn More About MEFA’s U.Fund College Investing Plan, The Massachusetts 529 Plan

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Disclosures:

The U.Fund® College Investing Plan is offered by MEFA and managed by Fidelity Investments. If you or the designated beneficiary is not a Massachusetts resident, you may want to consider, before investing, whether your state or the beneficiary's home state offers its residents a plan with alternate state tax advantages or other state benefits such as financial aid, scholarship funds and protection from creditors.
MEFA is a not-for-profit self-financing state authority that works to make higher education more accessible and affordable for students and families in Massachusetts through community education programs, college savings plans, and low-cost financing options.
MEFA, U.Fund, and the MEFA UFUND Massachusetts 529 Plan logo are registered service marks of the Massachusetts Educational Financing Authority.
Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation.
Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917
882132.5.0

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