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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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.