Piggy bank wearing glasses in a classroom

The pros and cons of a 529 plan

The sooner you start saving for college, the better it will be on your wallet in the long run. There are a few options you can choose, but one commonly used solution is a 529 plan. According to U.S. News, a 529 plan is a “college savings account that is exempt from taxes.” If you’re considering using a 529, here are some things to consider:

Jar of money labeled 529 plan

Pros:
  • Tax-deferred investments. Peterson's explains that when you withdraw money, you will be able to withdraw tax-free [2]. This can save some of your hard-earned money from being taken away from you.
  • It shouldn't affect your government aid. For anyone who has ever tried to apply for the FAFSA, you obviously understand that there are many ways to lose government aid. One of the great things about a 529 is that “they are assessed at just the 5.64% parental asset rate for the expected family contribution (EFC).” What this means is that your child isn't going to lose a bunch of government aid because you have this savings.
  • The funds are transferrable. If you find that one of your children doesn't use all the money in their account, you can transfer the money to someone that is related to them. This is perfect if you have more than one kid and one child receives more scholarship funds than the other.
  • You earn interest. Most of your money is put in stocks and bonds, so you earn money at a higher interest rate than a regular savings account. You can control your risk desire to fit your comfort level; be aware that less risk yields less money [2].
Cons:
  • The funds can be used for college only. One of the biggest drawbacks is that you MUST use the money for college. If you decide to use the money for other reasons, you will be penalized 10 percent as well as be charged the taxes of both federal and state tax earnings for your bracket [2]. So if you put in too much money, you will not be seeing all of it again.
  • The potential for higher fees. There are times when the fees associated with a 529 plan can go beyond those of regular mutual funds [3]. Between maintenance fees, advisor fees, program management fees and other things, you may find yourself paying more.
  • Fewer investment options. If you find that your other mutual funds are making more money, you don't really have the option to move your money. If you want to, you will be faced with the same fees stated above [2].

[1] The Ultimate Guide to Understanding 529 College Savings Plans
[2] The Pros and Cons of Using a 529 Plan to Save for College
[3] College Savings Plans Pros, Cons for Financial Newbies, U.S. News

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