While 529 plans are a great way to save for education, they’re often misunderstood. Whether you’re just getting started or already contributing, here are what I believe to be five common myths about 529 plans—along with the facts you need to know.
Myth 1: You can only use your own state’s 529 plan.
Fact: 529 plans are offered by states, but you’re not limited to your own state’s options. You can invest in any state’s 529 plans, and many families pick out-of-state options for better fees, performance, or investment options. For example, California does not offer a state tax deduction or credit for 529 contributions, so Californians are not missing out on a tax benefit by choosing an out-of-state plan. As a result, residents might benefit from shopping around for out-of-state plans with lower costs and more investment flexibility.
Myth 2: 529 plans should be your primary method for saving for college.
Fact: 529s are a great tool, however, they shouldn’t necessarily be your only method for saving for college. If your child receives a scholarship, skips college, or attends a less expensive school, you may be left with extra funds. Withdrawals for non-qualified expenses could be subject to income tax and a 10% penalty on the earnings. Instead, consider balancing your college savings with other savings options to mitigate the risk of having a large excess of 529 funds.
Myth 3: You can only contribute up to $19,000 per year.
Fact: While the annual gift tax exclusion is $19,000 (in 2025), 529s allow for superfunding. Superfunding allows you to contribute up to five years’ worth of gifts all at once, meaning you can contribute up to $95,000 per beneficiary, or $190,000 per beneficiary for married couples, without triggering the federal gift tax. You’ll need to file a special IRS form to spread the contribution over five years for tax reporting purposes.
Myth 4: 529 funds can only be used for public US universities.
Fact: More and more institutions are becoming accredited (and participate in federal student aid programs) making them qualified education expenses for 529 distributions. This means 529 assets can be used at public and private colleges, vocational schools, and even some international universities. You can use the U.S. Department of Education’s school code lookup tool to confirm whether a higher education institution is qualified for use of 529 assets.
Myth 5: 529 funds can only be used for college expenses.
Fact: While 529 plans were created to help cover higher education costs, recent changes have made them more flexible. Starting in 2024, you can rollover up to $35,000 from a 529 into a Roth IRA for the beneficiary, tax-and penalty-free. For contributions to be eligible for this benefit, the account must be open for at least 15 years. This change is great for parents worried about “over-saving” for college. If your child ends up not needing the full amount, the money can still support their future through retirement savings.
Final Thoughts: When leveraged correctly, 529 plans can be a powerful way to take advantage of compounding growth to save for your child’s future. By keeping informed, separating the facts from the myths, you can make choices about how to support your child’s future while maintaining financial flexibility for your family.
To learn more about how 529 plans can be used for your unique situation, contact your Raegen, Parker and Associates financial advisor or request an initial complimentary consultation: Request a Consultation.
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