529 College Savings Plans – Are They For You?

529 college savings plans are a great investment vehicle for college savings, and they have some interesting features that can make them very advantageous.

Here are some of the benefits of 529 college savings plans:

  • There are no income or age restrictions for contributing
  • High limits on contribution amounts – you can put away as much as $300,000+, which is especially helpful for those who have multiple children attending college in the future (whereas Coverdell Education Savings Accounts ONLY allow $2,000 in contributions per year per beneficiary)
  • You are NOT limited to just your in-state plan, so you can pick the best 529 college savings plan available for your college savings needs
  • You are NOT limited to only in-state colleges/schools if you use that specific state plan
  • There are 2 types of 529 college savings plans – investment plans & prepaid tuition plans – to choose from, depending on your needs
  • Tax advantages include tax-deferred growth, state resident 529 contribution tax incentives (need to check those for each specific state plan), annual gift tax exclusion of $13,000, 5-year lump contribution exception to avoid gift tax, and qualified withdrawals for school use are FREE from federal income tax
  • If the parent is the account owner, the 529 account is factored less heavily in the financial aid calculation formula (quite complex) than if it were in the student’s/child’s name (grandparent 529 assets are NOT considered in the financial aid calculation formula)
  • Beneficiaries can be changed easily if needed to other family members who will use the $ for higher education expenses 

There are also some possible disadvantages with 529 college savings plans though:

  • Sometimes these plans can carry high expenses in the form of administration fees, commissions, distribution fees, etc., so be mindful of those costs with each specific plan
  • You are limited to the investment choices your plan offers, and state prepaid plans offer no investment choices
  • Withdrawals that are not for qualified education expenses are not only subject to taxes, but also a 10% federal penalty on the earnings amount
  • Prepaid tuition plans are usually limited to your state of residence (there are exceptions to this)
  • You have a limited amount of allowed investment changes (1 or 2 per year for most plans)
  • All/some of your investment is subject to risk – there are no guaranteed returns 

Find an experienced financial advisor who often deals with 529 college savings plans, works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart & demeanor of a teacher, NOT a salesman, and chances are you’ve found the right financial advisor to help you prepare and plan for your college savings.

To learn more about Martin Federici, view his Paladin Registry profile.

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