Are 529 Plans a Good Idea? Part 2

529 plans are a popular option to save for college these days – but are they the best?

In Part 1 of this article, we took a look at just what 529 plans do. In this part, we’re going to examine the pros and cons.

The Benefits of 529 Plans

There’s no doubt – there are some good things about having a 529.

• Contributions and earnings may – may – be eligible for tax deductions. Each plan is different, though – be sure to check here to see which plans give the best tax breaks.
• Contributions can be made by anyone – and will always be controlled by the owner, not the beneficiary. No need to worry about a Porsche purchase by an unwise 21-year old.
• Withdrawals made from 529 plans are tax-free if they are used for college expenses.  That is a nice advantage IF there are any gains!

And… that’s about it. Everything else a 529 does can be done just as easily with any other investment vehicle.

But, not all is rosy in the 529 world.

The Problems with 529 Plans

There are plenty of downfalls to 529s.

• High fees – often double fees. You’ll be paying a maintenance fee to the state, and a custodial fee to the financial institution investing your money.
• Inflexibility. A 529 has to be used, for higher education, by the original beneficiary. If that person doesn’t use all the money, it can be rolled over to other family members – but no one else. If, for some reason, there’s no way to spend the 529 money, it can be withdrawn – but taxes and a 10% penalty will apply.
• Likewise, if there’s a purchase or expense that your child needs for his or her education – but it isn’t directly related to college expenses – your 529 can’t go towards that.
• They could definitely hurt your financial aid status. Some schools may count 529 plans differently then others, especially some private universities.

All in all, there are enough expenses in 529s to offset many of the tax breaks, enough limits to cause concern… and don’t forget the potential hit on your financial aid eligibility.

That’s not to say you shouldn’t have some money in a 529, if it makes sense for your particular situation. But relying on that solely could cost you big. Many alternative savings vehicles could give you just as many benefits, with far greater flexibility and far more guarantees!  529s definitely aren’t a fix-all. And, in many cases, they can do harm to your efforts to pay for college. You have to decide if the tax breaks are worth it.

Related Articles:

Part 1: Are 529 Plans a Good Idea?

What Are The Best 529 Plans?

What Are The Best 529 Plans? Part 2

Do 529 Plans Hurt Financial Aid?