The Pros & Cons of a 529 Plan

It's never too early to start saving for college, particularly because the cost of a college education seems to steadily increase year after year. A number of college savings vehicles are available, including Uniform Gift to Minors accounts, education IRAs and 529 savings plans. The 529 savings plan is a savings vehicle with several pros and cons, depending on your college savings plans.

Pro: High Maximum Contribution

Compared to other types of education savings vehicles, 529 plans typically allow you to make a much higher maximum annual contribution. Each state is allowed to set its own contribution limits; in some states, the maximum is as much as $300,000 annually, according to the Maryland Association of Certified Public Accountants (CPAs) in September 2010.

Pro: Tax Advantages

College 529 savings plans also offer certain tax advantages to investors. According to Saving for College, a 529 plan offers tax-deferred savings and tax-free distributions for qualified withdrawals. A qualified withdrawal includes expenses related to tuition, fees, books, equipment and in certain circumstances, room and board. In addition, certain states also allow investors to deduct full or partial contributions or claim an income exemption for withdrawals.

Pro: Availability

Investing in a 529 savings plan is not limited to a specific type of investor. According to the Maryland Association of CPAs, there are no age or income restrictions related to opening a 529. In some cases, you can open an account with as little as $25. You do not need to live in a particular state to participate in its plan, and upon withdrawal, funds can pay for qualified expenses at two- or four-year public or private institutions.

Con: Limited Investment Options

Depending on the state plan in which you participate, your investment options with a 529 plan may be more limited than those offered by other savings vehicles. Typically, 529 plans offer only mutual funds rather than individual stocks or bonds. You cannot transfer stocks or bonds you already own into a 529 plan without liquidating them first. Additionally, you may only change your investment choices once per year.

Con: Potential Penalties

The major caveats of a 529 plan is that you must use funds for qualified education expenses and you must do so within a certain time frame. According to the Maryland Association of CPAs, withdrawals used for expenses other than education are subject to regular income tax and a 10 percent withdrawal penalty. You must withdraw funds prior to the beneficiary reaching age 30 to avoid incurring a 50 percent tax penalty.

References

• Kiplinger: Pros and Cons of 529 Savings Plans
• Education: Pros and Cons of Section 529 Plans: A Look at the Benefits
• Peterson's: The Pros and Cons of Using a 529 Plan to Save for College
• Saving for College: Shifting UGMA money to a 529: The pros and cons
• Maryland Association of CPAs: The pros and cons of 529 college savings plans