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What are the Pros and Cons of 529 Savings Plans?

A college education is one of the most expensive things a family or individual will have to pay for in their lifetime. It makes sense for parents or guardians to start thinking about this as early as possible. One of the convenient ways to save is called a 529 savings plan or investment account. While they get a lot of attention as the best option, there are pros and cons to explore.

Pros of a 529 Savings Plan

A 529 educational savings plan offers multiple advantages over other types of funds. Perhaps the most obvious and important is the ability to save the money without paying income taxes on the gains. This is true for federal taxes. Some states may waive their taxes, too. Also, since the money is intended as a gift to the person going to school, $15,000 of the annual contribution is excluded from all taxes automatically.

If you are debating whether to get a 529 plan instead of a regular investment or IRA account, it is good to know that there are no true maximum deposit limits in most cases. States do make their own rules about these things, but the levels are above what most families will need to send one child to college for four years.

Cons of a 529 Savings Plan

Although you do not have to pay tax on the money deposited into a 529 college savings account right away, distributions may still demand tax payments if the money is not used for approved educational expenses. These include tuition, room and board, necessary books and supplies, and school-related fees. If the money is not used for an advanced education, you do need to pay taxes in order to get it out.

In fact, most of the negative characteristics of this type of fund only occur if the money is taken out and used for other purposes. You will have to pay penalties, federal and state taxes, and potential additional fees depending on the company you choose or specific funds you invest in.

The other potential disadvantage of 529 Savings Plans is if you should be saving the money for other purposes such as for retirement. While there are options for paying for college such as loans, attending part-time, or attending a less expensive college, there are not as many options for paying for retirement if you don't have savings.

Should You Start a 529 Savings Plan?

Ultimately, you need to weigh the pros and cons listed above with your individual financial reality when deciding to start a 529 college savings plan. The general flexibility of the investment options, high limits, and tax benefits may sway you in the "yes" direction. This is especially true if you fully intend for your children to go to college no matter what. 

As a parent, grandparent, or guardian of a child who may want to attend university in the future, the decision to start early matters most. Although you can invest money without tax penalties, you must consider the possibility that the child takes a different path in life. Whatever you decide, it helps to start as soon as possible to build up a good amount before they graduate from high school.