Many are guided by the tax benefits of a 529 plan investment account to decide to save their money for education. However, this should not be your only reason. Educational expenses you can pay with a 529 plan can range from tuition and tuition to books and gadgets.
A 529 plan is an investment account for funds used for qualified education expenses, especially college-related costs for your children or any beneficiary. So far, everything seems an excellent option to avoid the overwhelming student debt that many families carry, including graduates. However, like any financial product, you have its pros and cons. While you have greater benefits for saving this money specifically for school, it is good that you know those not-so-pleasant details so that you know how to deal with them in the best possible way.
Pros of a 529 plan
Tax-free growth and withdrawals
One of the main and greatest attractions of investment accounts in a 529 plan is the tax benefits they provide. The money you invest grows and can be withdrawn tax-free for qualified education expenses, which means that every dollar you save goes beyond any other type of investment account.
State income tax deductions
While you can’t deduct your 529 plan contributions for federal income tax purposes, 30 states offer a state income tax deduction, and in some cases, you don’t even have to contribute to your home state plan.
High contribution limits
Unlike other investment accounts such as individual retirement accounts (IRAs), 529 plans have no income restrictions that prevent people from contributing and have low contribution limits.
Lifetime contribution limits for a 529 plan range from $ 235,000 to $ 500,000, depending on the state you open it in, though most don’t even have annual contribution limits.
Flexibility to change the beneficiary
According to The Simple Dollar, each 529 plan has a designated beneficiary, who is the person for whom the money is saved. But you can change the beneficiary to almost any other family member, which means that if one child doesn’t need all the money for education, you can simply use it for another child, or even yourself, a grandchild, niece, or nephew.
Cons of a 529 plan
Limited for education expenses
Despite its tax advantages, if you don’t use the money from a 529 plan for qualified education expenses, the earnings you withdraw for other non-verifiable educational purposes are subject to tax and a penalty of 10% of your withdrawal.
Some states sanction K-12 expenses
A K-12 expense refers to any payment you make for primary or secondary education. Federal law allows tax-free withdrawals and zero penalties for qualified expenses of this type, however, some states can still enforce their penalties if money from a 529 plan is not used for higher education costs. The best thing is to approach an accountant or financial advisor specialized in these investment accounts to guide you in this regard if you want to use the account for students of lower degrees than university.
Expensive investments
529 plans are still investment accounts managed by an end entity ancient. In this sense, the investment options you have in this regard can be expensive, depending on the state in which you are. For example, a Montana 529 plan offers multiple investment portfolios that cost around 0.80% per year, as opposed to a New York 529 plan where each investment option costs you 0.15% per year.
You forget other financial goals
Saving for your child’s education is great, but if contributing to a 529 plan prevents you from saving for retirement, paying for health insurance, paying off debt, and getting other financial growth, then it’s not as good an idea as it sounds. The preparation of your offspring is necessary, but they can apply to scholarships for performance or certain talents that allow them to somehow pay for their university studies, something that you cannot do, for example, for your retirement or to pay what you owe.