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Educate yourself about 529
college savings accounts

To help offset the rising costs of college, many investors establish 529 accounts, which allow earnings on investments to accumulate tax-free. What’s more, as long as the money is spent on qualified higher education expenses, withdrawals are also tax-free. However, misconceptions about these accounts prevent some investors from taking full advantage of the tax benefits. Test your knowledge with the following True or False quiz.

If my child earns a scholarship or chooses to drop out of school, I’ll lose the money.

False. Usually, there’s a 10% penalty if you withdraw the money for anything other than higher-education expenses. However, if a scholarship is already covering those costs, you avoid any penalty for using the assets for other purposes. But bear in mind that you still will owe taxes on the earnings that have been accumulating tax-free. Before you withdraw, consider that the assets in a 529 account can continue to grow and be used should that student choose to attend graduate school. If your child doesn’t go to a university, remember that vocational schools are included in higher education costs. You also have the option of transferring the account to another family member, including yourself.

When my child turns 18, he or she can take control of the account and use the money to travel or buy a new car.

False. The child is the beneficiary, not the owner. Unlike a custodial account, the owner retains control of the assets. Only you can determine how the funds can be spent.

I can contribute to any state 529 program without limiting my child’s choice of school.

True. There are no residency requirements. Any state’s 529 college savings plan can be used for higher education costs anywhere in the country — and even at some institutions abroad. U.S. residents can contribute to a 529 plan in any state, although certain states do offer additional tax advantages for residents.

All 529 savings plans are the same.

False. Your state’s plan may offer tax deductions or exemptions, but there are other important considerations. Be sure to research the investment manager behind the program, and examine the company’s record with mutual funds and pension plans. Consider all the fees charged and look at past results — particularly long term. A state’s tax deduction might not be as attractive if the plan’s fees and operating expenses are higher. Different plans may also offer various minimum and maximum contribution limits.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors® and sold through unaffiliated intermediaries.