Pros and Cons of 529 Savings Plans


Many parents dream of giving their children quality education but not all can afford to send their kids to school especially in college. Good thing, states and educational institutions are now offering education savings plans, more commonly known as 529 Savings Plans. States, educational institutions and state agencies offer college plans to somehow secure the future of children by getting higher education. Authorized by Section 529 of the Internal Revenue Code, these plans are legally termed as “qualified tuition plans”. These educational plans exist to serve as motivators for parents to save up for the college tuition of their children.

There are two 529 Plan types: pre-paid tuition plans and college savings plans. Today, all the 50 states in the U.S. and the District of Columbia have at least a 529 plan for the people. Investing in educational plans can secure your children’s future but despite the promises these savings offer, there are also skepticisms about it. Is a 529 Plan secure or would saving money on your own to pay for your child’s college education safer? Here are some of the advantages of disadvantages of an education savings account:

List of Pros of 529 Saving Plans

1. Beneficiary Options
People who propose that parents should make the right decision of investing in 529 Saving Plans for their children say that what makes these plans rewarding is that if a plan for a particular child is not totally used, parents have the option to use the remaining amount of money for the education of another child in the family. This gives parents the chance to maximize their savings and for their other kids to get education. A relative can also be a beneficiary such as a nephew or niece. Even the donor can change the beneficiary and use it to go back to school.

2. Outstanding Value
For parents going for prepaid tuitions, there is the assurance that the education of their children will be taken care of without them having to worry about the increase in tuition fees in colleges and universities, especially in private educational institutions. According to a report, there is an increase of eight percent on college tuition fees annually. With prepaid education plans, these tuition fee hikes are irrelevant.

3. Tax Incentives
Prepaid Tuition Plans offer taxpayers certain exemptions since these funds are provided with tax benefits by the federal government so long as these particular plans meet certain requirements. Moreover, some states offer tax incentives to investors as well.

4. Flexibility
Another quality attributed to 529 Savings Plans is the fact that these plans can be saved in one state and be used in a college or educational institution located in another state. Parents can live in one state, save in another and send their children in schools located in a state other than the first two. This also ensures the education of the child even if his or her interest is not on taking a four-year college course but would like to study and go to a trade school instead. And when it comes to the limit of education level, 529 Savings Plans can also be used for post-secondary education programs.

5. Safe from Market Volatility
Parents have seen 529 Savings Plans take a dive with the bad economy years ago. However, college savings plans and prepaid Tuition Plans are not affected by this, making the investment safe and secure.

List of Cons of 529 Savings Plans

1. Penalties
Like other types of investments, critics of educational savings plans argue that aside from not being able to use the money for other expenses, if an individual desires to withdraw the money in the plan, there will be penalties to be paid. Income taxes will also be imposed on the plan holder.

2. Financial Concerns
Although there are parents who opt to save using 529 Savings Plans, there are also those who say that they would rather save money in banks or other investments and get the money for the tuition from interest and profits. Aside from penalties and taxes that need to be paid if withdrawal of savings is made, critics say that parents who use college savings plans cannot use their money on other important expenses like emergencies at home or life and death situations.

3. Costly Fees
Opponents of 529 plans contend that state-sponsored plans do not really offer much savings because they entail paying higher fees as opposed to other investments. Moreover, the funds for 529 plans are also placed in traditional investments. This also can affect the growth of the account and additional cost like broker fees.

4. Financial Aid Effect
One of the criticisms thrown at 529 Savings Plans is how they affect the eligibility for financial aid. Since the account owned by a parent will be reported as parental asset, the assessment will affect the child’s eligibility for financial aid. If the account is under the name of the parent, assessment will be a maximum of 5.64 percent to determine the expected contribution required to family or household. On the other, if the child owns the account, assessment rate will be higher. This can have an effect on loans and grants children my want to apply to.

5. Affect on Retirement Savings
Opponents of 529 Savings Plans say that some people contribute to college educational plans and end up neglecting saving for retirement. This can be a problem in the future since retirement does not have financial aid. It would be better to save for old age and save more than enough so there will be money left to fund education. Moreover, if a person is buried and debt and yet opted to put money in 529 Savings Plans, the interest for unpaid credit card bills will accumulate. Also, if emergencies do arise and the only way is cover these expenses would be to withdraw money from the plan, there will be penalties.

529 Savings Plans have good and bad sides that people should consider to determine if contributing to an educational plan is the best option for them. What is important is to choose the right 529 Plan and research thoroughly, while weighing the pros and cons.