The 529 plan is a type of account that you can use to save for college expenses for your children. While this type of account does have some advantages such as tax-exempt investment earnings, it also comes with some disadvantages. You might be better off to use another method to save for college expenses.
One of the drawbacks of using this type of account is that you have strict rules about how you can use the money. You have to use the money for qualified education expenses or you will have to pay a 10-percent penalty. For example, you can use the money for tuition, fees, books and room and board. Any other expenses that you might incur may not be eligible for this type of account.
With this kind of account, you may also have to pay substantial fees to invest. When you put money into your account, you essentially give it to an investment broker to keep for you. This broker will charge a management fee for this service. Since you most likely only have a few years to save for college, you need every dollar that you can get. If the investment company is taking a large chunk of your money in fees, it can be difficult to reach your goals.
Another reason that saving with this type of account can work against you is that it can hurt your chances of financial aid. Most of the government programs that award financial aid for students are based on need. If you have an account sitting there with a large amount of money in it, this counts as an asset when calculating need. Usually this will preclude you from getting financial aid, other than federal student loans.
Investing in a college 529 plan allows you to choose various investments. The problem with this kind of plan is that your investment options are generally limited. You can only invest in a few mutual funds, stocks and bonds. If you want to get involved in more exotic investment options, this type of account is not the right one for you. Active investors may not like this type of account because of the very few options that it provides.