529 savings plans, pro & con
When 529 college savings plans were established in 1996, families looked forward to a government-endorsed, tax-sheltered savings plan for higher education. A decade and a half later, reviews are mixed on whether or not the plans are all they’re cracked up to be. Here are 529 Plan advantages, disadvantages, and alternative college savings options.
Advantages
“The beauty of the 529 is that thei ncome comes out tax-free, so you enjoy the build-up of income and the growth of your capital without any taxes during or upon withdrawal of the 529 plan,” says Irvin Schorsch, president of Pennsylvania Capital Management Inc. in Jenkintown, PA.
The money must be used for higher education, but if one child can’t use it, another child or even a parent can. The sooner you begin saving, the better, to give the portfolio time to grow. “The biggest ally investors have is time — more important than money is starting early,” observes Schorsch. But it’s never too late, because money deposited in your child’s 529 account remains tax free, no matter how long it stays in the plan.
Almost every state offers 529 plans, and you can invest in any state’s plan. The Delaware and New Jersey plans offer no tax breaks to their residents. Contributions to the Pennsylvania plan are state income tax-deductible for PA residents up to $13,000 per contributor per year.
Disadvantages
The money in a 529 must be used for education, including college, graduate school or technical training. If you use the money for another purpose, you will pay income tax plus a 10% penalty on investment gains.
Investments can shrink. “When the market goes down and mutual funds lose value, people will lose value in their 529 plans,” explains Brian Weyman of Financial Aid Concepts and Tuition Strategies in Conshohocken, PA, and Marlton, NJ. “That happened in 2008.”
Participants are offered a narrow range of investment options and may only change their 529 plan investment option twice per year. Your plan’s return canbecome unattractive if your type of investment is out of sync with current financial markets.
Choosing the best plan
No two 529 plans are the same. Navigating the terms and choosing the plan that best suits your personal situation can be difficult. Considerations include the plan’s provider, the flexibility of choices, fees and expenses associated with the plan, and the level of support the plan provides.
Financial consultants well-versed in the plans can help you choose. You can also research 529 plans at sites such as Savingforcollege.com.
Impact on financial aid
Different types of college savings accounts are counted differently on the federal FAFSA form used by colleges to determine assistance. A parent’s 529 plan is counted as a parental asset; a Roth IRA is not counted as an asset; a Uniform Gift to Minors Act account (UGMA) is regarded as an asset of the student.
Terri Akman is a contributing writer to MetroKids.
