Pros and Cons of a 529 Savings Plan

“Pros and cons” is a classic decision-making technique often used to help whittle down two options to one. For many parents, the decisions surrounding their child’s higher education are some of the most crucial they will ever make. Why not turn to the old pros-and-cons list to figure out what your next move should be?

Several parents opt for a 529 college savings plan. It’s a popular financial account available nationwide to help pay for higher education. Here’s a quick glance at the positives and negatives of this particular payment route.

A purple background with a dark green circle, with the number 529 in the center.

Pro: The money is fixed

With a 529 plan, your tuition money is locked in as soon as you deposit it in the bank. It cannot be used for anything except higher education. While this may seem like a drawback on the surface, others see it as a safeguard that will keep people from being tempted to spend money they’ve put away. This money creates a shield against wasteful spending. You will not be able to take it out to pay for anything less important.

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 Con: Fees

Often, 529 plans are compared to mutual funds because of their similar structures. According to data collected over the past few years, though, 529 plans actually can bring higher fee rates than mutual funds, but only by around one-fifth of a percent. Still, this money does add up. This particular payment process can sometimes be a deal-breaker for families on the fence.

 Pro: Low starting amounts

One of the plan’s most famous selling points is the fact that you don’t have to have a huge amount of cash on hand to start an account. While you may imagine that you wouldn’t be able to start an account without a swimming pool of gold coins, some plans can be started with as little as $15 or $25, reassuring families who are uneasy about storing large amounts of cash right away.

 Con: Restrictions

This speaks for itself, but once you enter a 529 college savings plan, you are completely bound to the rules and restrictions placed upon your account. There’s no way to change your investment options. For people who prefer flexibility, this can be the straw that breaks the camel’s back.

 Pro: Tax breaks

529 plans are possible because of a provision in the federal tax code (section 529, funnily enough). Thus, they reward you for taking the leap with tax benefits. Your money deposited in a 529 account will not be taken into account for federal or state taxes, which can be a life-changing clause for a family struggling to save for college.

 Con: Hard cap

This may go hand-in-hand with restrictions, but it is good to know that 529 plans generally cap around $300,000–$500,000. For those who feel this cut-off point is overreach into their financial accounts, a private savings plan may be the way to go instead.

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One thought on “Pros and Cons of a 529 Savings Plan”

  1. Chris Cagle says:

    Many of the cons you mention are true, but are often overcome by the pros. For instance, yes there are fees, but because of the tax breaks, you actually make out in the positive compared to mutual funds.

    Other perceived problems like hard caps are likely not a real issue as there is little reason to save more than $300-$500k for typical colleges. The flexibility issue can be mitigated by taking a small penalty on any tax advantaged earnings if your child does not end up going to college.

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