"While many families across the country have begun to recognize the benefits of tax-advantaged 529 Plans, many are still confused about how they work and how they differ from other investment vehicles," said Tracy Lemoine, senior vice president, Fidelity Investments Institutional Services Company.

With many 529 Plans to choose from, including three state-sponsored plans managed by Fidelity, decisions may not come easily. To help, here's some information that addresses five common myths regarding 529 Plans:

Not necessarily. Some states do offer favorable tax treatment to their residents for participating in their own state-sponsored 529 Plan, such as state tax deductions up to a certain level for contributions and state tax-free withdrawals for qualified higher education expenses.

However, not all states provide in-state tax breaks for residents. In addition to state tax benefits, make sure you consider other factors when evaluating a 529 Plan, including investment choice and flexibility. Additionally, you may wish to consult with a tax advisor about state and local tax issues.

Myth #2: 529 Plan account assets can negatively affect my child's chances for financial aid.

Most federal financial aid formulas consider about 5% of parents' assets and 35% of a child's assets available for college.¹  Plans where assets are considered those of the parent, such as 529 Plans, tend to have a lower impact on financial aid than plans where assets are considered those of the student, such as a Uniform Gift to Minors Act (UGMA) account.

Keep in mind that grandparents' assets are not evaluated when calculating eligibility for financial aid. So, when a grandparent opens a 529 Plan account for the benefit of their grandchild, it has no affect on the child's initial evaluation for financial aid. For more information, you may wish to consult a financial aid advisor or a particular school's financial aid department.

Myth #3: I'm not eligible to open a 529 Plan account because I've already opened an UGMA.

Families can establish a 529 Plan account even if they've already opened another college savings account, such as an UGMA. In fact, an appropriate college savings plan may include a combination of various investment vehicles. It should be noted that some 529 Plans allow the registration of an UGMA/UTMA 529 Plan account. One benefit to doing this is that the assets, once subject to the "kiddie tax," will now grow tax-deferred and are federal income tax-free² when distributed for a qualified higher education expense.

However, there are some potential consequences of opening an UGMA/UTMA 529 Plan account. For example, the assets belong to the beneficiary and upon reaching the age of majority, the beneficiary can use the assets for any purpose. Also, you may not change the beneficiary on an UGMA/UTMA 529 Plan account, and since UGMA/UTMA 529 Plan account assets belong to the beneficiary, the beneficiary may not receive favorable financial aid treatment.

Myth #4: If I invest in a 529 Plan account, I have very little choice and flexibility with respect to my investment options.

Many 529 Plans have a wide variety of investment options to choose from, including age-based portfolios, static portfolios, and individual fund portfolios. Certain plans, such as the Fidelity Advisor 529 Plan, provide more flexibility than others with respect to the number of options they provide and your ability to select any age-based portfolio, regardless of the beneficiary's age. While you're only allowed to reallocate previously invested contributions and earnings among portfolios once per calendar year for a given beneficiary and upon the change in designated beneficiary, 529 Plans allow you the flexibility to change the investment allocation of future contributions at any time.

Myth #5: I can split my accelerating gifting up over two years.

The 529 Plan accelerated gifting provision allows an individual to make a gift of up to $55,000 (or $110,000 combined for spouses who gift split) to each beneficiary per year without triggering the federal gift tax. This requires that no further gifts be made to the beneficiary over the five-year period and that the gift is treated as a series of five equal annual gifts. You may not conduct accelerated gifting over multiple years, i.e., you may not gift $25,000 in 2003 and $30,000 in 2004. Whatever the gift, you must pro-rate the dollar amount over the five years. Assuming your goal is to have no federal gift tax impact, for each year you can only contribute the difference between the annual gift limit ($11,000) and what you have already given that year.³

Notes:

³In order for an accelerated transfer to a 529 Plan (for a given Beneficiary) of $55,000 (or $110,000 combined for spouses who gift split) to result in no Federal transfer tax and no use of any portion of the applicable Federal transfer tax exemption and/or credit amounts, no further annual exclusion gifts and/or generation-skipping transfers to the same beneficiary may be made over the five-year period, and the transfer must be reported as a series of five equal annual transfers on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. If the donor dies within the five-year period, a portion of the transferred amount will be included in the donor's estate for estate tax purposes. The UNIQUE College Investing Plan and the Fidelity Advisor 529 Plan are offered by the State of New Hampshire and managed by Fidelity Investments. Additionally, the U. Fund College Investing Plan and Delaware College Investment Plan are offered by the Massachusetts Educational Financing Authority and the State of Delaware respectively, and managed by Fidelity Investments. If you are not a resident of New Hampshire, Massachusetts, or Delaware, you may want to investigate whether your state offers its residents a Plan with alternate tax advantages. Fidelity Managed 529 Plan portfolios are managed by Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments Company. Brokerage services for the retail Fidelity-managed 529 plans are provided by Fidelity Brokerage Services LLC, Member NYSE, SIPC.