Pros and Cons of a 529 College Savings Plan

529 College Savings Plan
529 College Savings Plan

Saving money for college is a much bigger challenge now than it was just a few decades ago. With rising tuition costs, many families worry that the money they’re able to put away won’t be enough to fund their child’s higher education. And this is especially true for families with multiple children in the household.

There are, of course, more paths to saving now available, including 529 plans. Regardless of your level of income, a 529 plan is a great way to ensure your child has the money they need to further their education — not struggle with financial burdens while learning — and find success as a degree-holding adult.

However, as with any investment, it’s important to consider the inherent pros and cons before determining if a 529 plan is right for you. Here’s a quick list of what you should research when considering if this type of tax-advantaged savings plan is right for your family.

Pros of a 529 Plan

One great advantage to a 529 plan is that there are no annual contribution limits, which makes the plan an option for any family, regardless of income. The maximum aggregate limits tend to be high, as well, depending on your state of residence, with some states allowing up to a $529,000 annual contribution.

Another advantage to these types of plans is that large contributions up to $15,000 qualify for the annual gift tax exclusion, and as much as $75,000 annually as long as contributions will be spread out across five years of payments. This can be a massive advantage to households looking to qualify for tax exemptions for their own filing purposes.

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In addition to these tax advantages, here are some other benefits of 529 plans:

  • Tax-free earnings and withdrawals for qualified educational expenses, such as tuition, books, and room and board
  • State tax credits and deductions for contributions to the plan
  • Multiple options, based on the age of the student
  • The flexibility of use of plan funds, including trade school and apprenticeship funding, student loan repayment, and even transferring leftover funds back to the parents for them to take classes. 
  • No income restrictions to opening a plan, making it a great option for all families, regardless of income

Cons to a 529 Plan

Making tax-free investments, especially as it relates to funding your child’s future, is a major advantage for you and your family. However, these tax-advantaged plans also have their share of drawbacks, including the following:

  • There are minimum contribution requirements for opening the plan, as well as monthly minimums for continuing contributions. These can be quite significant in some states.
  • Your child could end up receiving less student aid, since the 529 plan increases the Expected Family Contribution (EFC), a factor that is used to calculate financial aid qualifications. A higher EFC could mean fewer subsidized loans, federal grants, and work-study opportunities are available to the beneficiary.
  • Non-qualifying withdrawals are taxed and given a 10% penalty.
  • Depending on your state of residence, you have little to moderate control over where the money is invested.

Choosing What’s Right for Your Family

Looking at the pros and cons of a 529 college savings plan is the best way to determine if it’s a smart move for your family. As with any financial decision, it’s always a good idea to speak with a financial advisor or 529 plan administrator to learn specifics about what is available within your state.

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