Busting Seven Myths About State 529 Plans

State-sponsored 529 college savings plans have been around for decades, but many families are still unfamiliar with them or have misconceptions.

This can cause them to overlook the increasing benefits of investing in one of these tax-friendly plans, missing an opportunity to lessen the financial burden of their children’s college education.

A 2024 survey by the Public Policy Institute of California found that one-third of parents in the Golden State reported they worry daily (or almost every day) about being able to save enough to put their children through college.

A 529 plan can help ease those worries. Money invested in a 529 grows tax deferred, and withdrawals are 100% tax free when used for qualified expenses.

So if you haven’t looked into 529 plans for a while, you may not be aware of how flexible they are.

Here are seven myths about state 529s:

Myth 1: You need a lot of money to benefit from a 529.

Many 529 plans allow you to open an account with $25 or less and have low minimum requirements for subsequent contributions.

With a ScholarShare 529 account, a college savings plan offered by California, you can open an account with any amount and choose the investment options that fit your savings goals. A 529 account makes it easy to save with one-time or recurring contribution options, and you can invite family and friends to contribute with Ugift^® for birthdays, holidays or "just because."

States set generous caps on the amount that can be contributed on behalf of a beneficiary. In California, for instance, contributions can be accepted until the balance reaches $529,000.

But even if you invest modest sums, you can still reap the benefits of years of compound growth in this tax-sheltered account.

The ScholarShare 529 College Savings Calculator can help you develop a savings goal based on projected education costs.

Myth 2: 529s are too restrictive.

You might be surprised by the number of qualified expenses. Besides the basics of tuition, fees, books, and certain room and board expenses, you can use the money for supplies, computers, internet access, printers, equipment necessary for special needs students to attend classes and more.

Savings can be used at community colleges, four-year colleges and universities, vocational schools and registered apprenticeships.¹ This applies to schools in the U.S. and many abroad.

Also new to the list of qualified expenses: 529 funds can be used after high school to pay for workforce training and credentialing expenses, such as tuition, fees, books and required testing.

Myth 3: The money is lost if a child doesn’t go to college.

The money isn’t lost if it turns out your child doesn’t need the funds for higher education. You can transfer the money to another eligible beneficiary, such as a sibling, stepchild, cousin or even yourself.

The account never expires, so you could leave the 529 savings invested in case your child later decides to go to college or needs the funds for other qualified expenses, such as workforce training.

You can also withdraw the money at any time for purposes not related to education. However, the earnings on the withdrawal will be subject to federal and state income taxes and a 10% penalty.²

Myth 4: Only parents can open a 529.

529 accounts are primarily opened by parents, but anyone over the age of 18 can open an account, including one for themselves.

Grandparents may find that a 529 can be a useful and seamless way to transfer wealth to a younger generation while maintaining control of their money.

See “How 529s Go Beyond Saving for Education” for other benefits of the plans.

Myth 5: A 529 account hurts a student’s financial aid.

Parents need not worry. A parent-owned plan is financial aid friendly.³ Under the federal financial aid formula, the account will be viewed as a parental asset rather than funds belonging to the student, which means it will count less against financial aid eligibility.

And as of the 2024–2025 academic year, distributions from a grandparent-owned 529 no longer have any negative impact on the student’s aid. This can make 529s more attractive to grandparents who are worried that their account would reduce a grandchild’s aid.

Myth 6: Investing is complicated.

Investing can be very simple. You can choose investments that are based on a child’s age or that match your risk tolerance.

With the ScholarShare 529, the most popular options are the Enrollment Year Investment Portfolios, which require very little work on your part. You simply choose the portfolio with the date closest to when the student is expected to head to college. The portfolio will invest more heavily in the stock market when the child is young and gradually become more conservative as that date approaches.

For teens closing in on college, ScholarShare offers a low-risk Guaranteed Portfolio Option that can provide a stable return.

And experienced investors may select one of the Risk-Based Portfolios—from conservative to aggressive—which allows them to choose an investment based on its strategy.

Learn more about ScholarShare 529’s low-fee investment portfolios and how to choose the right one for you.

Myth 7: It’s too late to open a 529 account once a child is a teenager.

Of course, the earlier you start, the better, but it’s never too late. Every dollar saved today is one less that parents and students have to borrow later.

Granted, many parents face competing financial goals, including their own retirement. But keep in mind that you don’t have to finance the entire cost of college from savings. One popular guideline is to pay one-third of college costs from savings, one-third from current income and financial aid, and the rest from loans.

So whether your child is in pre-K, middle school or high school, the time to open a 529 is now. Start your investment and let the tax benefits give you a boost throughout your savings journey.

With a ScholarShare 529, you can open an account with any amount of money in 15 minutes.

Sponsored by TFI.

To learn more about California's ScholarShare 529, its investment objectives, risks, charges and expenses see the Plan Description at ScholarShare529.com before investing. Read it carefully. Investments in the Plan are neither insured nor guaranteed and there is the risk of investment loss. TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, is the distributor and underwriter for ScholarShare 529.

Ugift® is a registered service mark of Ascensus Broker Dealer Services, LLC.

1 Withdrawals for registered apprenticeship programs and student loans can be withdrawn free from federal and California income tax. If you are not a California taxpayer, these withdrawals may include recapture of tax deduction, state income tax as well as penalties. You should talk to a qualified professional about how tax provisions affect your circumstances.

2 Consult your legal or tax professional for tax advice. If the funds aren't used for qualified higher education expenses, a federal 10% penalty tax on earnings (as well as federal and state income taxes) may apply. Non-qualified withdrawals may also be subject to an additional 2.5% California tax on earnings.

3 The treatment of investments in a 529 savings plan varies by school. Assets are typically treated as the account holder’s and not the student’s. (Student assets are generally assessed at 20% whereas parental assets are generally assessed at 5.6%.) Any investments, including those in 529 accounts, may affect the student’s eligibility to get financial aid based on need. You should check with the schools you are considering regarding this issue.

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