Clearly, once I have a theme, I can’t let go. It’s back-to-school month and that could make some of us feel guilty about the lack of savings we’ve done for our kids’ college. What’s holding you back? Maybe by clearing up a few misunderstandings about college savings, it will motivate you to start a 529 college savings account for your little darling.
Myth #1:
My kid will have to go to an in-state school to use the money.
Fact: 529 college savings accounts, although state-sponsored, do not require the money be spent for in-state schools only. The state-sponsored part only designates whether the person adding to the account will get a state income tax deduction for the contributions.
Myth #2:
My kid has to go to a 4-year university to use 529 account money
Fact: Savings can be used nationwide at any eligible public or private college, university, vocational or trade school.
Myth #3:
I need a lot of money to start at 529 account.
Fact: 529s can be started with as little as $15 (Vanguard Colorado 529 Direct Portfolio, for example). So, even if you only have a few bucks, you can start a fund that can at least help out with buying text books.
Myth #4:
A 529 account will ruin my child’s chance at financial aid
Fact: 529 money is counted as the parent’s asset when calculating the Expected Family Contribution. Only 5% of parents’ non-retirement accounts are factored in to the formula. You are much more likely to not get financial aid based on your annual income than a balance in a 529 account.
Myth #5:
My kid will get a football scholarship and not need the money I’ve saved.
Fact: Not likely. BUT, if your child does get scholarship money of any kind, 529 money can be taken out in a matching amount without IRS penalty. You will pay income tax on the earnings of the money withdrawn but not the contributions you made.
Don’t let fear stop you from preparing for the future. Even a little monthly contribution will be appreciated when Junior starts college.
