6 myths about 529 plans

529 plans only offer tax and financial aid advantages

Also not true. Several states, including Louisiana, Missouri and Arkansas, offer matching grants to help give your 529 plan a boost. Grants are typically only reserved for plan holders who earn under a certain benchmark -- that amount varies by state -- and some grant funds are doled out on a first come, first serve basis, meaning it's worth your while to investigate those options early.

Some state 529 plans also provide significant tuition discounts. For example, to open Florida's prepaid college plan, either the account holders or beneficiaries have to have lived in Florida for at least the past 12 months before opening. Once opened, the plan allows beneficiaries to qualify for in-state tuition at Florida public institutions, regardless of where the student lives. The University of Alaska school system also offers in-state rates to students who have been the beneficiary on a state 529 account for at least two years.

529 plans are flexible

Compared with other investment accounts, 529 plans aren't really flexible. Plan holders can only change their 529 portfolios once per year, reports the SEC, and funds can only be used for qualified education expenses without incurring a penalty.

"Let's say you have a 529 plan and you have some sort of family emergency and you need to pull assets out of your 529 account," Reyes says. "What happens at that point in time is it's considered a non-qualified withdrawal. ... You'll pay income taxes on the earnings and you also pay a 10 percent penalty (on earnings only)."

If a student decides not to attend college, chooses to go to an unaccredited institution or heads out of the country to an institution that doesn't qualify, account holders can either roll over their funds to themselves or another beneficiary in the family or they'll have to pay back taxes and the penalty.

529 plans cost the same

Like other investment accounts, 529 plans each come with their own fees and commission structures, says Roger Michaud, senior vice president and director of the college savings program at Franklin Templeton Investments. Direct-sold plans cost less, but don't offer active management by an investment professional. Broker-sold plans are actively managed but usually cost substantially more.

Direct-sold plans typically cost 25 basis points or below -- that's 0.25 percent of the value of the plan or less -- but "depending on the program, I'd say the range (on broker-sold plans) is 20 to 25 basis points on up to that 1 percent level where that fund may be diversified both internationally in stocks and domestically as well," Michaud says.

To figure out which plan is going to pay off the most, future 529 holders need to carefully evaluate the tax benefits, fees, investment options and performance history of several plans before settling on one, Michaud says.

"The winner isn't always the low-cost provider," he says.


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