Before investing in a college savings plan, it is important to consider the pros and cons that come with. If you are thinking to use a 529 plan for your child, the following list will be of much help.
List of Pros of 529 Plans
1. They let you earn interest.
Working like mutual funds, 529 plans may operate differently by state, but most of them invest your money in bonds and stocks with the aim to make it grow faster than regular bank savings accounts. Most plans do pretty well at managing your money, but you still have to research any plan before you sign a contract.
2. They are tax-deferred investments.
By investing in a 529 plan, the withdrawals you will make are most likely tax-free. Actually, this provision was set to expire in 2010, but due to recent law changes, it is still a benefit that we can enjoy for years to come.
3. They let you contribute as much as you want.
These plans allow you to invest as much money as you want every year, except for the pre-paid tuition plans, which limit your contributions, like what an IRA does.
4. They are an automatic investment option.
529 plans offer an automatic investment option that automatically withdraws a specified amount of money every month from your savings or checking account. Of course, you are still the one to determine the amount and, better yet, you get to enjoy hands-free investment that would prevent you from spending your money on something else.
5. They make your money portable.
529 plans allow you to transfer your money from one state to another to support your child in attending any college he chooses. Both pre-paid and savings tuition plans can be transferred among your family members, so if one of your children decided not to attend college, you can use the fund for another’s tuition.
List of Cons of 529 Plans
1. They require you to only use the money for college.
If you decided not to use the invested money on college tuition, you will receive a penalty of about 10% of the total amount when you make withdrawals other purposes. Plus, both the federal and state government will impose tax on your account’s earnings based on your tax bracket.
2. They limit your investment options.
Though 529 plans are tax deferred, you might give up the chance to change your mind about investing your money anywhere else. This means that if you find a mutual fund that would make more interest than the 529 plan and like to reallocate your money, you will be subjected to the 10% penalty that is previously mentioned.
3. They could affect your eligibility for financial aid.
As of the moment, eligibility for financial aid is not affected much by 529 plans, as they are considered part of your assets in calculating the Expected Family Contribution (EFC) towards costs of attending college.
Based on the pros and cons listed above, do you think 529 plans can help with your bottom line or not?