Myth 4: I'd be better off stashing the money elsewhere. There are rules to 529 plans that individuals who have invested in the stock market for a long time tend not to like.
Plan participants have limited choices for where to put their money, and can only buy and sell those investments once per year. Account owners also can't deduct losses on their taxes if the value of their mutual funds decreases.
[Take these steps before opening a 529 plan.]
However, "If parents save outside of 529 plans, they're missing out on a variety of benefits," Steinhoff says.
For instance, they won't qualify for tax-free growth of investments used for qualified education expenses, he says. Plus, there are a variety of investment options available within 529 plans, satisfying parents who like more control over investment choice.
As far as deducting losses, Bruno says, parents should ask themselves if they would rather have the ability to deduct losses or the ability to avoid taxes on plan growth. Since 529 plans historically have earned money, most of Bruno's and Steinhoff's clients prefer the latter.
Myth 5: I should stash every bit of college savings in a 529 plan. Parents shouldn't put every dime they think their children will need for college in a 529 plan, says Sarenski. A student could drop out after two years, or may earn a scholarship.
Parents should put some money for college in other investments for flexibility of use, he says. Plus, they can use the money for college expenses, such as transportation, that can't be withdrawn from a 529 plan without incurring a tax penalty.
Trying to save for college? Get tips and more in the U.S. News College Savings 101 center.