Mythbusting 529 Plans

There remain many misconceptions about 529 plans. We've listed here the answers to ten frequently asked questions.

Get the facts on 529 college saving plans

  • FACT: There are no restrictions or requirements mandating use of a 529 plan in the state in which an Account Owner or Beneficiary resides. However, before investing in any 529 plan, you should consider whether your or the Beneficiary's home state offers a 529 plan that provides its taxpayers with state tax and/or other benefits that are only available through the home state's plan.

    iShares 529 Plan Fact: Arkansas residents can deduct contributions of up to $5,000 ($10,000 married) per beneficiary per each year from their taxable income, and earnings are not subject to AR state income tax.1

  • FACT: You can use the assets at any eligible school (one that can participate in federal aid programs) around the country and abroad. That includes 2- and 4-year colleges, graduate schools (including law and medical), and vocational or technical schools. For a full list, visit FAFSA.

  • FACT: There are no income limitations for a 529 plan. Contribution funding limits vary and are established on a per state plan basis. In fact, "Accelerated Gifting" allows the Account Owner to elect to apply up to five years of annual gift tax exclusion allowances in a single lump sum contribution (up to $70,000 individually or $140,000 if married, filing jointly) in a single year per beneficiary without incurring a gift tax.2

  • FACT: Unlike other college savings options, a 529 plan Account Owner controls the account. That means you can change the Beneficiary to another eligible "member of the family" (as per plan rules) with no tax penalty.3 Assets in a 529 plan account can grow in perpetuity; there are generally no time or age limitations on use or distribution of plan assets.4 The Account Owner can also use the funds for his/her own higher education expenses as well.

  • FACT: There is no maximum age for a 529 plan Beneficiary. Considering career retraining? You can be your own account's Beneficiary, or you can become your own account's Beneficiary, providing you are an eligible "member of the family" (related to the original Beneficiary per the plan rules). As long as your school is eligible to receive federal student aid and is listed in the FAFSA database (see list here), you can use your 529 plan assets - even if you are not attending full-time.

  • FACT: You can use your 529 savings plan account to pay for many "qualified" higher education expenses, including tuition, fees, room & board, and any supplies required by the school.

  • FACT: 529 Plan assets have a relatively small effect on federal financial aid eligibility because they are considered assets of the Account Owner (vs. the Beneficiary) on the FAFSA (Free Application for Federal Student Aid) and will be factored into the EFC (Expected Family Contribution) at a rate of 5.6%, just like any other parental asset if the Account Owner is the parent of the student. You should consult a tax advisor for more information specific to your situation. Visit FAFSA for more information.

  • FACT: If the Beneficiary receives a scholarship, 529 plan assets - up to the amount of the scholarship - can be returned to the Account Owner with the customary 10% penalty on "non-qualified" withdrawals waived. However, any earning will be subject to federal income tax, and possible state and/or local income tax.5

  • FACT: Funds deposited into a custodial account are irrevocable. The minor owns the money as soon as it goes into the account, and upon reaching the age of majority (usually 18 or 21, depending on the state), he or she will assume sole ownership of the account. Further, student ownership of the account may have an adverse effect on financial aid, as custodial assets are considered student assets, which will be factored into FAFSA's (Free Application for Federal Student Aid) EFC (Expected Family Contribution) at a rate of 20%. Investment income from custodial accounts is also subject to income limits of the "Kiddie Tax," which has increased effectively to age 24.6

    For a comparison between 529 college savings plans, Coverdell accounts and custodial (UGMA/UTMA) accounts, click here.

  • FACT: With few exceptions, there are no limitations on Account Owners or Beneficiaries. Parents, grandparents, aunts, uncles, friends - almost anyone can be an Account Owner, provided they are a U.S. Citizen or resident alien, have a Social Security number or Tax ID number, and have a permanent U.S. address. Even Trust, corporations, and non-profit organizations with valid Tax ID numbers may be Account Owners.

Comparing college savings options

There are currently three main options for tax-deferred college savings. See how the iShares 529 Plan compares to other savings options, feature by feature.

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