Benefits and Considerations Of A 529 Plan And The Alternatives
By, Jeremy Reif, CRPS
Researching and checking out 529 plans? A 529 plan could be a good idea for saving money for education expenses. Worried about overfunding a college savings plan and then the kiddos end up not going to college? It ultimately depends on your specific financial goals and circumstances. Here are some factors to consider when deciding whether a 529 plan is the right option for you or if you should save money elsewhere:
Education Savings:
If you have a specific goal to save for education expenses, such as funding your child’s college education, a 529 plan can be a tax-advantaged way to do so. The same principles and rules are the same for parents, grandparents, aunts, uncles, or whoever decides to save the money in one of these 529 plans. These plans allow your contributions to grow tax-free, and withdrawals for qualified education expenses are also tax-free.
Tax Benefits:
One of the primary advantages of a 529 plan is the potential for state tax benefits. While contributions to a 529 plan are not federally tax-deductible, some states offer tax deductions or credits for contributions to their state-sponsored 529 plans. Please be aware, these rules can and have changed over the years, you need to check out your specific state. Additionally, as mentioned earlier, the growth and withdrawals for qualified education expenses are typically tax-free.
Flexibility:
529 plans offer flexibility in terms of the choice of beneficiary. If the intended beneficiary decides not to pursue higher education or receives a scholarship, you can change the beneficiary to another family member without incurring penalties. This flexibility can be beneficial if your plans change or if you have multiple children. There are usually rules that accompany this statement. For example, some 529 plans allow you to change beneficiaries only one time per year.
Investment Options:
529 plans typically offer a range of investment options, allowing you to choose an investment strategy that aligns with your risk tolerance and time horizon. It’s important to review the available investment options, fees, and performance track record when selecting a 529 plan. Not all plans are created equal.
Financial Aid Considerations:
It’s worth noting that 529 plan assets are considered parental assets for federal financial aid calculations, which generally have a lower impact on aid eligibility compared to student-owned assets. However, withdrawals from a 529 plan are counted as student income and may affect eligibility for need-based financial aid in subsequent years.
Plan Rules – Per State:
Be aware of your State’s 529 plan rules. For example, some plans will state that contributions have to be there for 1 full year in order to receive certain benefits such as the state tax credit. This is to avoid people opening up accounts and turning around and sending the college tuition the following day and still getting a corresponding tax credit. Alternative Savings
Alternative Options
Opposed to 529:
Depending on your financial goals, there may be other savings options worth considering.
- Traditional banking accounts: Regular checking or savings account, High-Yield savings account, Certificates of Deposit (CDs),
- Individual Retirement Accounts (IRAs): While IRAs are primarily designed for retirement savings, they offer some flexibility. You can withdraw contributions penalty-free for qualified education expenses, although you may still owe income tax on the withdrawals. Traditional IRAs offer tax-deferred growth,
- Roth IRAs offer tax-free withdrawals in retirement. Roth IRAs have special rules. Amounts that were originally deemed as contributions can come back out without penalty prior to age 59 1/2. Consult with a financial advisor to understand the implications and limitations of using an IRA for education savings.
- Taxable Investment Accounts: If you have long-term savings goals and are comfortable with some level of risk, you can consider investing in taxable investment accounts. These accounts offer a wide range of investment options, such as stocks, bonds, mutual funds, or exchange-traded funds (ETFs). While there are no tax advantages like in a 529 plan, you have more flexibility in how you use the funds.
- Older options that were used for minors for one reason or another are not used as often as since the 529 plan was introduced. Education Savings Accounts (ESAs), ESAs are also known as Coverdell Education Savings Accounts. Uniformed Transfer to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA) are other tax-advantaged options for savings.
It’s essential to carefully consider your financial goals, risk tolerance, and the specific requirements of each savings option. Consulting with a financial advisor can help you make an informed decision based on your individual circumstances and preferences.