Financial Advice Blog

Are 529 Plans the Best Way to Save for College?

by Community Manager  |  San Antonio, TX  |  ‎05-12-2014 07:17 AM

College piggy bank - shutterstock_70975837.jpg

Some would call my oldest son an academic overachiever. He’s dead set that he’s never getting anything but A’s on his report card — through the rest of middle school and high school. Oh, and apparently my wife and I can stop saving for his college because he’s going to get an academic scholarship. Suhweet! We are off the hook! Of course, I’m learning that teenagers have a tendency to shift their focus from time to time so I think I’ll keep saving ... just in case.

 

The reality is, saving for college is a topic that comes up quite a bit in my line of work. Specifically, I’m often asked whether 529 college savings plans are the best way to stockpile money for this intimidating expense. As a financial planner by trade and an owner of a couple of 529 plans by choice, here are my thoughts on the subject.

 

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The Right Answer? Just Save
I'll start by saying that the most important — and often most difficult — decision regarding any college savings plan has nothing to do with which program you’ll use; it’s actually doing the saving. That said, if the sole purpose of your efforts is to pay for college, I’m a big fan of 529 college savings plans. 

 

The Pluses
While not an exhaustive list, here are some key advantages of 529 plans:

 

  • No income tax bills – Any growth in these plans is tax-deferred, and if withdrawals are used for qualified college expenses, they are tax-free. Given the price tag of a college education, no taxes could save you a bundle.

  • Minimal management needed – To make investing easier, most 529 plans offer a range of prepackaged investment alternatives that include both static allocation plans and age-based plans. Static allocation plans are a mix of investments that are regularly rebalanced to keep a certain blend of asset classes. Age-based plans are a mix of investments that start off more aggressive when the child is younger and get more conservative as college admission time draws near. The account owner only needs to select the approach; the plan managers take care of the rest.
     
  • You stay in control – Unlike some savings strategies for children, 529 plan assets typically never become the property of the child. For the control freaks like me out there, this is a nice feature. It means you can change beneficiaries or even withdraw the money and use it for other purposes. Just know that if the money doesn’t go toward college expenses, you’ll likely face taxes and penalties on any earnings that are withdrawn. This makes doing so inadvisable, but it’s an option if you really needed it. Control granted!


The Minuses
In keeping with the spirit of nonexhaustive lists, here are a couple of potential drawbacks of 529 plans:

 

  • College expenses only – Unless you’re interested in paying taxes and penalties to the IRS, you won’t be using these dollars for anything except qualified college expenses. This means no using it for private elementary or high schools, and money for cars, computers in high school or even the senior class trip must come from elsewhere. The money has to be used for college. Use it to pay for anything else and it could cost you.

  • Fewer investment choices – I mentioned earlier that most 529 college savings plans come with a list of prepackaged investment selections. While that’s a great benefit for many folks, those who like to have more control over their investment choices may see it as a drawback. The investment choices that come with the plan are typically all you get.

 

What’s the Best Approach?

As I mentioned earlier, the best approach to college saving is to actually do it. While the choice of college savings programs is something to be considered carefully, there is no one best solution for all situations. For my family, the positives of 529 college savings plans outweigh the negatives. Oh, and by the way, if my son does end up getting that scholarship (he's a pretty smart kid), I can always transfer his account to his younger brother or pull out the amount of the scholarship penalty-free (but not tax-free). Fingers crossed!

 

 

 

DID: 205311 - 0514

Comments
by Charleyhorse ‎01-07-2015 11:02 AM

Hello Scott

 

What did you mean by:"pull out the amount of the scholarship penalty-free?"

 

Is there any penelty or cost for transferring to another 529 program?

 

Mahalo

Cliff

by Community Manager ‎01-07-2015 03:15 PM

Thanks for the questions, Cliff. Let’s take them in order.

 

What did I mean by “pull out the amount of the scholarship penalty -free?”

If you pull money out of a 529 plan and it isn’t used for qualified education expenses, you  would typically have to pay taxes on the growth portion of the withdrawal as well as a 10% penalty. However, if the child receives a scholarship, you can pull up to that much money out for that year and use it for whatever you choose without having to pay the 10 penalty. You would still have to pay taxes on it though.

 

Is there a penalty or cost for transferring to another 529 program?

There is no IRS-imposed penalty or cost however, the plan provider might charge a fee for closing and transferring the account so you’d want to be sure to check that first.

 

Thanks again!

 

-Scott

by Matthew C. M on ‎03-02-2015 11:19 AM - last edited on ‎03-02-2015 11:52 AM by Community Manager

Sir,
Regarding parental management with multiple children.  Can there be multiple beneficiaries with one 529 program?  For instance, if I have one child under post-9/11 GI benefits (child A) and another who is not (child B), will the 529 program simultaneously cover left over expenses for child A while also covering expenses for child B?

Cheers,

Matt

 

by Community Manager ‎03-02-2015

 

Thanks for the follow-up, Matt!

 

I’m afraid the answer is no, a 529 plan cannot have multiple beneficiaries. You can change the beneficiary from one child to another but two people can’t benefit from a 529 plan at the same time. So, if you’ll have both children in college at the same time it’s typically best to have separate plans for each of them (even though it will require some additional planning).

 

Thanks again and I hope this helps!

 

Scott