Despite the fresh horror of the rising cost of college, few people seem to understand the tax-advantaged account that will help you pay for it.
A recent survey from Edward Jones found that only about 30 percent of American adults were able to correctly identify a 529 plan as "an educational savings plan."
The St. Louis-based brokerage firm polled 1,004 adults via phone in April.
Other answers included "a retirement savings plan," at 17 percent and "I don't know," which was chosen by 34 percent of participants.
Just to be clear, a 529 plan permits families to save money for qualified educational expenses and generally have it accumulate free of taxes.
Families can take tax-free withdrawals from the account to cover college costs, including tuition, fees, books, room and board.
You'll need all the help you can get: During the 2017-2018 school year, the average private non-profit college charged $46,950 for tuition, fees, room and board, according to the College Board.
Public in-state expenses for the same period were $20,770.
"There's a general awareness on the importance of a college education and we all know how expensive it is," said Danae Domian, a principal at Edward Jones. "It's perplexing as to why there is so little awareness on the ways people can do something about it."
Common errors
Despite all the virtues of 529 plans, misconceptions about how they work continue.
A 2016 survey by SavingforCollege.com found that nearly 20 percent of parents and grandparents erroneously believe they must use the 529 plan offered in their state of residence.
On the contrary, you can choose any plan — not just the one in your home state.
If your home state is among the approximately 30 to offer a tax break for saving in a 529, be sure to look deeper and see how the fees stack up.
More than 10 percent of the 1,777 participants in the SavingforCollege.com survey believed that if a child doesn't go to college, they'll lose the money saved in the plan.
This is incorrect.
If your child decides not to attend college, you may be able to repurpose the funds and use them to cover vocational school. You can also change the beneficiary to another member of your family.
Think twice before taking a withdrawal for non-educational purposes: You'll be on the hook for income taxes and generally a 10 percent penalty on the earnings.
Elementary and secondary school
The Tax Cuts and Jobs Act recently expanded the use of 529 accounts so that families with children in private elementary and secondary school can make withdrawals up to $10,000 a year to pay for tuition.
The Edward Jones survey found that even after the broadened applicability of these savings accounts, 65 percent of the respondents said they were not more likely to open a 529.
Be aware that even if the federal government allows you to pull money from your 529 plan to cover K-12 expenses, your state's tax laws may differ.
That means that the state in which you reside may consider this a non-qualified withdrawal and you could face taxes, penalties and a clawback of your tax breaks if you use your 529 to foot the elementary school bill.
Factors to weigh
"You don't need a lot of money to start saving," said Domian of Edward Jones. "A little investigation and research can go a long way toward helping your kids."
As you compare your options, consider the following:
Risk and return: Understand the allocation of your child's portfolio. Age-based portfolios reduce equity exposure as the college start date approaches. Heavy allocation toward stocks might make sense if your child is an infant; it's probably too risky if your child is a sophomore in high school.
Fees: Be on the lookout for enrollment and maintenance fees. Investment costs can vary dramatically across plans: Costs for age-based portfolios in the Utah Educational Savings Plan range from 0.17 percent to 0.60 percent, while the NJ Best 529 College Savings Plan has fees between 0.41 percent and 0.91 percent.
Advisor-sold vs. direct: As of 2015, average fees for advisor-sold 529s were 1.04 percent, while direct-sold plans were 0.51 percent. Know what you're paying for: Is your advisor's guidance worth an additional fee for planning or a commission?
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