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Smart Savers Blog

6 Myths of Saving in a 529 Plan


529 plans have been around for decades, and although they’re a college savings vehicle that continues to grow in popularity, a number of misconceptions about them persist. Here are some of the biggest myths about saving for education using a 529 plan.


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

Reality: You will never lose all the money. While it’s true that if you take a non-qualified withdrawal, you’ll pay income tax and a 10% penalty on the earnings portion of the withdrawal, your contributions were made with post-tax money. That means any contributions to your account will not be taxed or penalized --- the money in the account is always yours.

To avoid an unqualified withdrawal, consider:

  • Using the funds to pay for community college, vocational school or other eligible qualified education expense. Related: 4 Ways to Use a 529 Plan
  • Changing the beneficiary to a sibling or other qualifying family member who will attend college.
  • Using the money to pay for your own continuing education.
  • Saving the funds for a future grandchild.


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

Reality: Remember, any contributions will not be taxed or penalized --- 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 beneficiary earns a scholarship.

Students 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.


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

Reality: Your child can attend almost any college, no matter where your 529 savings plan is based.

This includes four-year public and private colleges, community college, trade schools and even some international schools.


Myth: 529 plans are only for children.

Reality: There are no age requirements for a 529 plan beneficiary.

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

For example, Virginia offers state residents a tax deduction for 529 plan contributions. An older student who decides to pursue graduate school could claim the deduction and reinvest it in their savings.


Myth: 529 plans can only be used for college expenses.

Reality: 529 plans can also be used tax and penalty-free for qualified vocational and graduate school education. In recent years approved 529 uses have been expanded to include some secondary school expenses and student loan repayment, as well. Related: 529 Funds Can Now Be Used for Apprenticeships, Student Loan Repayment


Myth: I’ll need to save for the full cost of my child’s education.

Reality: Unfortunately, very few families are able to save the full cost, but remember, every dollar you save is a dollar you won’t have to borrow later. Plus, financial aid is designed to bridge the gap between the cost of school and what your family can be expected to pay.

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.

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.