Are These Myths Preventing You from Saving for Children’s Higher Education?

We started to save for our daughter’s future education shortly after they were born (for our second daughter, we did wait nearly four months before opening a 529 plan for her ) and since then we have been making monthly contributions to their 529 accounts, currently5. Th at $14,77e reason for deciding to help our children is quite simple: We want them to go to the schools at their choices when the time comes without having to worry about how to pay for it themselves. I was lucky enough to finish my college tuition-free, but my parents did support me with all other expenses. Now, I want to do the same for our children. Somehow I feel it’s an obligation. With annual college inflation running twice as much as the general inflation, the cost of college education could become a heavy burden to them after their graduation if our children have to pay for their own education.

Though participation rate in 529 plan has increased exponentially in recent years, according to Investment Company Institute, not every parent has taken the full advantage of the vehicle to save for college because of misunderstandings of the plan. Last week, I received an email from Fidelity which points me to an article on college-saving myths, which clarifies some common misconceptions of 529 plans. The following are the excerpt of the article.

Myth 1: Saving in a 529 plan will affect my child’s eligibility to receive financial aid
Truth: Assets in a 529 plan are owned by parents, not the child. Though the assets are only assessed at 5% when determining federal financial aid, as opposed to 20% for child-owned assets.

Myth 2: I shouldn’t risk investing my money in a college savings account when the market is so volatile
Truth: Trying to time market is never a good idea to invest in stocks. Instead, making contributions regularly (dollar cost averaging) help to smooth the ups and downs in the short-term.

Myth 3 : I’ll lose control over the assets in a 529 plan if my child decides not to attend college
Truth: Parents can eaisly change beneficiary if the child doesn’t want to go to college. In the worst case scenario, the money in a 529 plan can be withdrawn for purposes other than higher eduction at a 10% penalty.

Myth 4: 529 plans offer limited investment options
Truth: Though 529 plans don’t have the flexibility to offer all the investment options available, many plans do provide a wide selection of investments such as bonds, index funds and age-based portfolios at low costs.

Myth 5: I don’t have enough money to open a 529 plan
Truth: There are many 529 plans require a minimum initial investment as low as $50 and monthly contribution of $15 with an automatic investment plan. You don’t have to have a lot of money open a 529 account.
Myth 6: I don’t want to limit my child’s college options by having to invest in my state-sponsored 529 plan
Truth: Anybody can invest in any 529 plan, not just those sponsored by the resident’s own state, though some plans do offer extra tax incentives to the state’s residents.

Myth 7: The contribution limits of 529 plans won’t allow me to save enough for college
Truth: Unlike IRA accounts ($5,000 limit for 2008) and 401(k) accounts ($15,500 limit for 2008), annual contribution limits of many 529 plans can be as high as $300,000.

Myth 8: You can get a better return on your investments if you create your own portfolio of funds versus savings in a 529 plan
Truth: Because of the 10% penalty, a dedicated college savings plan can prevent parents from withdrawing money from the account for day-to-day spendings that are not related to higher education.

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