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 If, for some reason, there’s no way to spend the 529 money, it can be withdrawn – but taxes and a 10% penalty will apply.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.

Until next time,

Scott Weingold
Publisher, CollegeMadeSimple.com

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?

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3 Comments

Erick L.September 3rd, 2010 at 7:41 am

Too many options for the average family to pore through, but there is something called an Independent 529 plan, which lets you prepay tuition and apply it to some 240 member colleges and universities that for the most part make up small, independent schools.

ralph laurenSeptember 6th, 2010 at 7:15 pm

Good job, and well thought out.
Keep posting stuff like this i really like it
Great articles & Nice a site….

nick nicolaidesMarch 20th, 2011 at 7:16 am

after 3 yrs I have lost $5oo

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Editor's Note: Scott Weingold has been ranked the #1 “College Financial Aid Expert Worth Knowing About” in the entire country by CollegeStats.org.  He has co-authored the book, “The Real Secret To Paying For College. The Insider’s Guide To Sending Your Child To College – Without Spending Your Life’s Savings.” Scott also publishes a popular free online newsletter, “College Funding Made Simple" which reveals insider’s tips, methods, and strategies for beating the high cost of college.

Scott is the co-founder and a principal of the widely renown College Planning Network, LLC – the nation’s largest and most reputable college admissions and financial aid planning firm. CPN is a proud member of the Better Business Bureau, the National Association of College Funding Advisors, the National Association for College Admission Counseling, the National Association of Student Financial Aid Administrators and the Student Affairs Administrators in Higher Education.

Scott, along with his college funding advisory team, helps thousands of families throughout the country with their college planning needs and offers a series of free educational webinars and workshops on “How To Pay For College Without Going Broke In The Process!” He's been featured or mentioned in The Philadelphia Inquirer, Yahoo News, TheStreet.com, Voice America with Ron Adams, Crains Cleveland Business, and on Cleveland Connection with James McIntyre.  Scott has published numerous articles and is a professional speaker who has addressed thousands of audiences online and offline throughout the United States.  His actionable insights and candid, open approach have earned him & his team numerous media interviews, citations, and speaking opportunities, and his free online video workshop is one of the Internet’s most widely viewed pieces in the college funding space.