Weighing the pros and cons of 529 college savings plans

The national conversation about college, its cost, and how to pay for it has largely focused on loan forgiveness over the past few years. At an event a few weeks ago, I had a conversation with a new parent who was struggling to decide the best college approach for her young child in the context of everything going on.

Should he devote even a fraction of his limited resources to a cause surrounded by so much uncertainty? What is the “correct” answer?

The correct answer is to save.

I’ll start there because the most important and often the most difficult component of any savings plan isn’t where to save, what investments to choose, or which program to use; it does a roaring job of saving. That said, if your current savings goal is to pay for college, a 529 college savings plan is worth a look.

The plans made a lot of sense for my family, but you have to decide if it’s right for you. To help with that decision, here are what I consider to be the top pros and cons of 529 plans.

The sides

While not an exhaustive list, I consider the following to be the main positives of 529 plans:

No income tax bills. Any growth within these plans is tax-deferred, and if withdrawals are used for qualified education expenses, they are tax-free.

Minimal management required. Most 529 plans come with a prepackaged list of investment alternatives to choose from. There are usually static allocation plans where the investment mix is ​​recalculated regularly to maintain a certain mix of asset classes. There are age programs that begin more aggressively when the child is young and become more conservative as the time approaches for college admissions. The parent only has to choose the approach and the plan managers take care of the rest.

You stay in control. Unlike some other child savings strategies, 529 plan accounts owned by the parents never become the property of the child. This has become a nice feature for us. Our kids have all graduated from college and we have money left in one of our 529 plans. thanks son for joining the army and letting him foot the bill. We now have the flexibility to change beneficiaries to help our grandchildren or even our children with their higher degree work. The ability to change beneficiaries or even withdraw the money at some point and use it for other purposes provides peace of mind as you choose to save for college in these uncertain times. Because a “non-qualified withdrawal” is likely to result in taxes and penalties on the income withdrawn, it’s not usually an advisable course of action, but it’s something you can take if you want to. Control is given


And in the spirit of non-exhaustive lists, here are some potential disadvantages of 529 plans:

Focused on education. If you are not interested in paying taxes and penalties to the IRS, you will not use these dollars for anything other than quality education expenses. A few years ago, post-secondary education costs were added to the list of “qualifiers,” but if you have limited resources (don’t we all) and have to choose between your kids’ college or your retirement, I’d choose: save for retirement On that note, Secure Act 2.0 includes a provision that could allow you to slide the $529 balance into your children’s Roth IRA; see your tax advisor for details.

Research is still needed. Programs differ in terms of investment offerings, fees and expenses, investment limits, and even state income tax benefits. Some plans have cost structures designed to be sold by advisors with commission or asset-based compensation. So if you decide to make the leap, do your homework and compare programs in these areas.

The best approach.

As I mentioned earlier, the best approach to saving for college is to just do it. While choosing a college savings plan should be carefully considered, there is no one best solution for all situations. For my family, the pros of 529 college savings plans outweighed the cons. This may or may not be the case for you, but hopefully this information will help you make an informed decision as you map out your plan to pay for college.

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