One important step of college planning is to consider ways to start saving money to ensure your child’s future success in college. College can be expensive and having a college planner that breaks down these expenses can give you a clear picture of how much you will need to set aside. There are many different ways to save money to consider, when it comes to college savings.
One plan that may be an option for you is the 529 plan. This plan allows you to invest in high-return assets while avoiding taxes on capital gains. These earnings can then be withdrawn tax-free for qualified education expenses. While this sounds great, there are some downsides that you should consider before investing in this plan.
Potential Downsides to 529 Plans
According to Edward Jones, just 20% of American parents have saved or are planning to save through a 529 college savings plan. This low number comes from a variety of factors such as:
- Not all 529 plans are the same- This plan has a broad outline which is tax-free distributions for qualified investment expenses. The rest is entirely up to each state which means that the cost of the investment may vary, as well as minimum contributions and how the plans are administered.
- Limited investment choices- This plan is not the same as a traditional savings account. The money you put into this account can be invested, typically through mutual funds. This is decided by each state, and depending on what you are looking to invest in, it may not be your best option. For new investors, the limit of options could be beneficial, but for those familiar with investing, it could be too limited.
- Triggering a penalty- 529 plans have strict rules when it comes to college savings. The funds have to be used to pay for qualifying educational expenses such as tuition, room and board, and textbooks. If you happened to take out more than you needed, you would be taxed on the surplus amount, as well as a 10% penalty rate.
- Contributions and fees can be high- The fees you pay are linked to the individual investments themselves. In some situations, your investment dollars will have to work harder for you to generate solid returns. As your money grows, you may be paying more. It is important to weigh the pros and cons of your fees. 529 plans can also impact the overall federal aid package.
- Time- With this plan, it is important to start investing as soon as possible. This gives you a longer chance for your money to grow, as well as a longer recovery time from the ups and downs experienced in the market. If you start too late, you may be looking at a higher contribution rate to meet your required savings.
Finding a Plan for You
Saving for college doesn’t have to be difficult. There are several options available. What matters most is finding what will work best for your specific circumstances. At College Benefits Research Group, we provide several tools and workshops to explain all the options available when it comes to saving for college. Our workshops can provide you will all the information you need to make smart decisions for college planning.
Additional Resources:
- https://www.bankrate.com/investing/529-plan-disadvantages/
- https://www.thebalance.com/what-are-the-disadvantages-of-529-plans-4584843
- https://www.consumerscu.org/blog/advantages-and-disadvantages-of-529-plans
