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Smart Savers Blog

7 Myths of Saving in a 529 Plan

529 plans have been around for decades, and although they continue to grow in popularity, some misconceptions about them persist. Here’s what you need to know about some of the biggest 529 plan myths.


Myth: I’ll lose all the money in my account if my child doesn’t go to college.

Reality: College isn’t a path for every child, but 529 plans are designed to be flexible and protect your money.

529 accounts can be used tax and penalty-free for tuition and qualified expenses related to technical schools, graduate schools and registered apprenticeship programs. 529 accounts can also be used for student loan repayment and K-12 tuition. Related: 4 Ways to Use a 529 Plan

You can also use the money for your own education, transfer it to a sibling or other qualifying family member, or save the money for the future.

But, if you make a withdrawal and use it for something other than education, you’ll pay income tax and a 10 percent penalty on the earnings portion of the withdrawal since your contributions were made with post-tax money.


Myth: If my child gets a full ride scholarship (academic or athletic), I’ll lose the money in my account.

Reality: Remember, any contributions will not be taxed or penalized so long as they are used for qualified higher education expenses– the money put in is always yours.

Yes, earnings that are not used for qualified higher education expenses are subject to a 10 percent federal tax penalty, but there’s a special exception when the student earns a scholarship.

Account Owners can avoid the 10 percent penalty on non-qualified withdrawals up to the amount of the tax-free scholarship. The earnings portion of the withdrawal, however, will still incur income tax.

The money in the account can also be saved for further education, such as graduate school. Or you can transfer the account to the child’s sibling or other qualifying family member.


Myth: My child can only go to college in the state where my 529 account was opened.

Reality: Your child can use 529 funds for tuition and mandatory fees at eligible educational institutions, no matter what state your 529 savings account is based in.

This includes four-year public and private colleges, community college, graduate schools and even some international study. Related: Looking to Pay for Study Abroad?


Myth: 529 plans are only for children.

Reality: There are no age requirements for beneficiaries (students) of a 529 savings account.

Younger children will have more time for their investments to grow in a 529 account, but older students can still take advantage of federal and state tax benefits.


Myth: It’s too late to start saving.

Reality: There’s no time like the present to put away money for education.

The sooner you start, the more time your investment will have to grow. But even if you don’t start early, every dollar you save is a dollar you or your child won’t have to borrow later.


Myth: I’ll need to save for the full cost of my child’s education because I won’t be eligible for financial aid.

Reality: Like any non-retirement investment or savings, 529 accounts may affect a student’s eligibility for need-based financial aid – however, the impact is typically minimal.

Unfortunately, very few families can save the full cost of a child’s higher education. However, whatever you save now can help you or your child borrow less in the future. Plus, financial aid is designed to bridge the gap between the cost of school and what your family can be expected to pay. Related: Impact on Financial Aid

Want to set a target to save for? Virginia529 offers a variety of tools and calculators that help you compare the impact of starting to save now versus waiting a year or more on your overall costs, determine a monthly contribution to reach your goal and gain insight into your potential financial aid eligibility.


Myth: I’ll have to make a lot of complicated investment decisions.

Reality: Although there is a wide range of investment options to meet your needs and saving strategy, Virginia529 provides its Portfolio Selection Assistant to help you research options.

Whether you decide to go the “set it and forget it” route and pick an age-based portfolio that will adjust automatically as your child gets older, or you’re looking for a savings option designed to protect against losses to the original amount you’ve invested, Virginia529 works to ensure families don’t miss out on setting up their savings.


This blog post is intended for informational purposes only. Virginia College Savings Plan does not give financial, legal or tax advice. You should consult with a financial professional regarding your individual situation.

Resources to help you learn

Frequently Asked Questions

Find answers to the most common questions about 529 plans.

Smart Savers Academy

Tune in to a live episode and ask questions of the presenter, or watch a previously recorded webinar below.

Invest529 Portfolio Performance

Review and compare historical returns of Invest529 portfolios.