Not sure which college savings plan is right for you? See also NerdWallet’s Best 529 Savings Plans of 2013.
Picking a 529 plan is quite good, especially if it is to help save for your child’s college education, but one thing should be taken into consideration and given a good thought. For you to take a decision on anything, especially if it involves a financial decision, make sure you look at both the advantages and the disadvantages. On that note, here are a few benefits and drawbacks on picking a 529 plan for the purpose of saving up for your child’s college education.
The Benefits of picking a 529 plan:
High possibility of getting tax free returns on a 529 plan: In most cases, when one invests in a 529 plan in order to save for a college education, the returns gotten, that is final withdrawals, are usually tax free. This happens in a lot of cases, but there are still cases where one would need to confirm this by referring to the IRS publication 970.
A 529 plan returns interest on investment: This particular benefit requires a little bit of research, because it doesn’t always work as planned, but for most of the time, it works. 529 plans are usually operated just like mutual funds, in the sense that most of them place the investments by clients like you into high return programs like stocks and bonds in order to help grow your money a lot faster. Although, some states do operate such investments in a different manner, but all in all, the operators of a 529 plan always do well in ensuring you get interest on your investment. To be clear about this, make sure you ask relevant questions and do some studies on your plan, before you go ahead to sign whatever documents you will be given. The important thing is making sure you are comfortable with the process, the level of risk involved and the returns you are anticipating.
Your contributions are not limited: 529 plans for college savings, give you liberty to contribute as much money as you would want to each year.
Your money is transferable: With a 529 plan, you can transfer your money from one state to the other, especially in the case of relocating to another state.
Drawbacks of picking a 529 plan
You can only use your money for college purposes: As a 529 plan investor, you are only allowed to make use of your withdrawals for college purposes only. Failure to do this would attract a 10% penalty on your withdrawals. Also, using your withdrawals for something else, gives the federal government and the IRS the free-hand to tax your alternative account.
You cannot re-invest without attracting a penalty: Just as you are not allowed to use your money for other purposes other than for college education; you also cannot transfer your investments to another mutual fund, in the event that the latter savings plan gives you more interest than the 529 plan. If you do this, you would be given a 10% penalty
Disclaimer: This article is a part of NerdWallet’s series of user perspectives on 529 Plans. The views and recommendations in this piece are held by the individual contributor and do not necessarily reflect the opinions of NerdWallet as a whole.