Negative Sides of the 529 College Savings Plan

Many parents in the United States see the 529 plan as the perfect concept for savings for their children’s college education. The main reason behind this is the fact that a 529 plan has a numerous benefits. 529s offer parents the opportunity to contribute funds to state-operated investment plans. These funds grow over time grow and are tax-deferred thus ensuring enough funds for the college days of your children.

However, there are certain downsides of the 529 which need to be considered before making a decision. Being aware of the potential problems can give users the benefit to minimize or prevent them.

The first potential problem can be generated by the investment funds. With a 529 plan, users are usually limited to the investment options that the specific 529 plan makes available. This can have a negative effect in cases where a plan offers a poor selection of investments combined with series of additional costs and administrative fees.

The second notable downside is the high penalties in case you want to use the funds for something else. In situations where the account holder decides not to use the funds for college, it will be penalized 10. Additionally, the state and the federal governments will tax the earnings on the user’s account which will result will additional losses.
Another problem that may arise is the potential of excess funds. In case a user has money on the account after the college graduation of his children, then those funds will be penalized and taxed by the authorities. That is why important planning and estimation is necessary before enrolling into a 529 plan.

The third aspect is seen through the prism of financial aid eligibility

Currently, financial aid eligibility isn’t affected much by 529 plans (college savings plans or pre-paid tuition plans) because these plans are considered part of the parents’ assets in the calculation of the Expected Family Contribution (EFC) toward college costs.

That is why, in some cases parents should consider other options for college savings.

One interesting option can be Roth IRA.  This concept is based on the terms where a user contributes money after-tax and invest it through mutual funds. However, the account holder will have the benefit to pick a brokerage. This will give more investment options compared to the 529 plan where everything is done through the state administrator. Also, users can withdraw the contributions without the potential of facing penalty fees. Additionally these funds will be tax-free when the parents turn the age of 59 ½. The Roth Ira also gives the option to start saving much earlier.  On the other side, the 529 plan requires that your kid has a Social Security number before starting the savings.

The bottom line is the proper planning is the key element when deciding about college savings plan. By having a proper analysis and financial estimation, parents can make the ultimate decisions in order to secure their’s children bright future.


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