by Martin Federici, Jr.
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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