Money Myths: Are 529 Plans the Best Way to Save for College?
New parents might wonder how they can afford college for their child. With tuition costs and student loan debt on the rise, parents should start preparing for their child’s future as soon as possible. Enter the 529 college savings plan — a program run by individual states to help parents grow their college savings fund over time. But are 529 plans really the best way to save for college?
What is a 529 Plan?
A 529 college savings plan is a tax-advantaged savings or investing account designed to help parents and other loved ones save for a child’s education. There are two main types of 529 plans:
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Prepaid Tuition Plans: These allow parents to buy college credits at the current rate, locking in the cost. The main advantage is that you protect your child from rising tuition costs without risking your contributions with investments. However, these plans generally cover tuition and fees only and may be restricted to in-state residents and schools.
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Investment Plans: These are more common and operate like a regular investment portfolio, with a mixture of stocks and bonds that grow over time. Contributions aren’t tax-exempt, but future earnings are tax-deferred, and withdrawals are tax-free as long as they are used for educational purposes like tuition, books, and room and board.
Benefits of a 529 College Savings Plan
A 529 plan is generally considered a simple and convenient way to save. The main advantage is the tax-based savings.
"While contributions to a 529 plan aren’t exempt from federal taxation, the future earnings are tax-deferred, and any withdrawals are tax-free as long as you spend the money on educational purposes," said Andy Tapparo, president of Tapparo Capital Management.
Drawbacks of a 529 Plan
While 529 plans are popular among financial professionals, not all parents choose to use them. A recent survey revealed that only one in five parents had a 529 college savings plan. So why might some parents opt out?
High Fees
Some 529 plans come with high fees. However, this can be mitigated by choosing a state plan that offers lower-cost options. For example, the Utah 529 plan is run by Vanguard and offers low-expense options, even for out-of-state residents.
What If Your Child Doesn’t Attend College?
Another concern is what happens if your child decides not to attend college. In such cases, parents can name another immediate family member as the beneficiary and use the funds for their education costs. If that’s not an option, the money can still be withdrawn for non-education purposes, but penalties will apply.
"It’s not like you can’t access the money at all. You can withdraw money for non-education purposes, but there are penalties," said Kaleb Paddock, certified financial planner and founder of Ten Talents Financial Planning.
Conclusion: Is a 529 Plan Right for You?
A 529 plan is an excellent option for parents looking to save for their child’s education, especially if they start early and plan to use the funds strictly for educational expenses. However, it’s essential to consider the potential drawbacks, such as high fees and penalties for non-educational withdrawals. Understanding your financial situation and goals will help determine if a 529 plan is the best way for you to save for college.
Want to explore more college savings options? Check out our guide to 529 plans.
Description: A family planning their child's future college savings, exploring the benefits and drawbacks of 529 plans.
