Day #262: Pros and Cons to the 529 College Savings Plan

The following is a guest post from Charles at CreditDonkey, a credit card comparison site.

Pros and Cons to the 529 College Savings Plan

529 college savings plans have garnered tremendous attention from savvy planners and financial advisors, especially around tax time. These types of savings plans are essentially tools for building money for your child’s college education. The biggest benefit of a 529 college savings plan is the tax break, but they also have several other features – some positive, some negative – that should be explored before opening an account.

Pros of a 529 College Savings Plan

There are many advantages to a 529 college savings plan, including:

  • Tax Benefits – The biggest advantage of a 529 college savings plan is the tax benefits. Any money put into a 529 plan grows tax-deferred, and any distributions that are withdrawn to pay for your child’s college education are also federally tax-free.
  • Tax Breaks – You may also find that your state will also offer tax breaks for your 529 college savings plan. For example, your state may offer you an upfront deduction or even income exemptions on withdrawals – and that’s on top of the federal tax breaks. Of course, each state will offer different benefits through their 529 college savings plans, so do your research to find which benefits your state offers.
  • Parental Authority – Many parents really enjoy the fact that 529 college saving plans allow them to remain guardian over the money from beginning to end. In short, as the parent, you control when, how and under what circumstances the money is withdrawn.
  • Easy Savings – Saving for college under a 529 plan is simplified. Aside from filling out a simple enrollment form, there is not much to do when saving under a 529 college savings plan. You can even set up automatic deductions to really simplify the process! These college savings plans are professionally managed through either your state or an outside investment company, so essentially your only responsibility is to pay into the account.
  • No Tax Headaches – There is no filing a Form 1099 with a 529 plan. In fact, you won’t need to report any earnings until you begin making withdrawals.

Cons of 529 College Savings Plans

Of course, with every financial instrument, there is a share of disadvantages, such as:

  • Lack of Investment Control – Because 529 college savings plans are professionally managed, you don’t have a say in how your money is being invested. Your only option is to choose among the many mutual fund investments offered.
  • Differing State Plans – Depending on the state in which you live, the rules vary greatly. Because many 529 college savings plans have only been operating for a few years, it’s quite hard to tell if the plan you chose is really the best plan for your financial goals.
  • Penalties for Non-Education Withdrawals – If you withdraw the 529 money for anything but education-related expenses, you can expect to pay handsomely in taxes. This may be a problem for children who receive a scholarship and may want to use the money for other expenses. It may also be difficult to take such a big loss if all of the money in the 529 plan does not get used.

529 college savings plans are an excellent way to reduce your own tax bills, as well as save towards your child’s future without having to pay Uncle Sam on your growth.

As your child approaches high school graduation, consider adding him or her to your own credit card account. Better yet, allow your child to have their own student credit card, which will help your child build credit now that they are an adult. Combine a credit history with the funds from a 529 plan, and you have truly helped launch your child into the world!

 

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