We all know how much paying college tuition can cost. It’s certainly not a petty expense. For many people, the preparation for going to college starts much earlier in the form of the collection of funds for college expenditure. One such thing is the 529 plan. It is a widely known and used plan. But, before you use it for yourself, you must understand the 529 plan’s pros and cons that it brings.
What is a 529 plan?
It is a tool to encourage savings for higher education expenses. It is tax advantageous which makes it likable among the general public. There are two main types of 529 plans. They are prepaid and education savings. In the former type, a school is picked beforehand and the savings can only be used for the specific school. In the latter option, investment is immediate and the school can be chosen at a later date.
Now let’s discuss the 529 plan’s pros and cons.
Advantages of the 529 plan:
Benefits in Tax
The investments in these plans increase without having to pay taxes. Also, the distributions are tax less when used for making education expenses that are qualified, including fees, books, and room costs. It also includes K-12 tuition and student loan repayment. They are the only ones that extend state tax benefits.
Low maintenance
This plan can be opened online as well as through an advisor. For people who do not remember the due date of payment, an automatic investment plan can be linked to a bank account. The program manager handles the current investment management within this plan.
The contribution limit is high
Unlike any other savings plans that are present in the market, the 529 plans have no annual minimum contribution limit. For tax purposes, the plan’s contributions are considered completed gifts in favor of the beneficiary.
Financial aid treatment is favorable
The ownership of the 529 plan is treated as a parental asset. And, while considering a student for financial aid, it has minimal effect. This plan is not counted towards income on the application form for student aid.
Flexibility
The 529 plan extends the same benefits to all the investors, regardless of their household income or the amount contributed to them. The place where you live or the place where the beneficiary will attend college has nothing to do with the benefits. They are the same for all.
Disadvantages of the 529 plan:
Non-qualified withdrawals attract penalties
If you make withdrawals from this plan except for the qualified distributions, you will be subjected to income tax as well as a 10% penalty on any earnings that you may have gained from the distribution. However, there are certain exceptions to this rule. The exceptions include getting a scholarship, attending a military academy, becoming disabled, or death.
Recapturing by state income tax
If you get another state’s 529 plan, any tax deductions that you may have previously claimed may be recaptured by the state. In addition, any earnings from it may become taxable income.
Investment choices are limited
There are only a limited number of options for investment that the owner of a 529 plan can select from. These options are provided by the 529 plan. These are typically portfolios that have minimal risks.
Fees
Many people lose a huge amount of money in the form of 529 plan fees. This results in lesser savings for college. The plans that are directly sold are less expensive than the ones that are sold by the advisors. But, there are different portfolios also which can have varied expenses. So, research your options and find a plan that meets your needs.
Rules of ownership
The legal control of the money that is in the account is in the hands of the account owner and not the listed beneficiary. Another problem is that the owner can change the beneficiary at any time. And, they can also liquidate the plan without any say from the beneficiary.
Conclusion
To conclude, upon looking into the 529 Plan’s Pros And Cons, there are both advantages and disadvantages of the 529 plan. Even if the 529 plan sounds like the perfect solution for your education expenses, research alternative ways that can be more beneficial for you. After all, it is a matter of your future. So, take some time, research all your available options and only then make your certain choice.
Frequently asked questions
- Is there only one type of 529 plan?
Answer- No. There are two main 529 plans from which you can choose accordingly.
- What happens to the money if the beneficiary does not go to college?
Answer- You can also use the money to pay for certain apprentice programs that are registered. You can also spend the money to pay for elementary and secondary education as well as pay for student loan repayment.
- Can I contribute money to someone else’s account?
Answer- Yes. You can donate or give money to someone else’s 529 accounts also.
