The 529 college savings plan: Is it really worth it?

by Joy Mali Writer

As educational expenses are increasing, more and more parents are searching for ways to finance their children’s tuitions and other school-related fees. To ease the burden of educational expenses, the government has created savings plans solely for covering the expenses of higher education. Among these savings accounts, the 529 college savings plan is the most popular. However, just like other savings plans, the 529 may not work for everyone. To help determine whether or not the 529 college savings plan is right for you, read the facts about the plan below.

The 529 college savings plan work similarly to other savings plans such as the 401(k). The 529 offers a variety of options that you can choose from according to your budget and your educational needs. When you withdraw the funds you have invested in your 529, they are tax-free. You just have to make sure that you spend the money on school-related expenses such as your college tuition, textbooks, laboratory fees, and lodging. If parents or other benefactors are the ones contributing to your 529, they can include their contributions under their itemized list of tax deductions as long as they live in the same state as you (the plan’s beneficiary). Another thing that might encourage your parents or other benefactors to invest in your 529 college savings plan is the fact that you will not be able to access to the money invested in it without their permission. Even if you reach the legal age, as long as your parents or other benefactors are the ones funding your plan, then you will need to ask for their consent.

Unfortunately, there are several reasons as to why the 529 plan may not work for everyone. Listed below are some factors that you need to consider before starting on your 529 savings:

• Penalty fees- Before you decide to invest in the 529 plan, you should know whether or not you will pursue and complete your college education. If your parents or other benefactors have already started investing in the plan and you decide not to further your education, then a new beneficiary (such as a sibling or friend) can be assigned. However, if there is no one to be the beneficiary of the plan, the investors will have no choice but to withdraw their money and pay the penalty, which is 10 percent of the investment. Aside from the withdrawal fees, only withdrawals that will be spent on educational expenses are tax-free, so any money withdrawn for another purpose will be taxed.

• Additional fees- The 529 savings plan has other fees that need to be paid, including fund management fees. If you cannot afford to pay them, it might be a better idea to put your money in another investment that does not require additional fees.

• Risks- Just like any other investment, the 529 savings plan has risks. You should never put your money into just one investment, especially one in which the returns vary, as you never know when these investments might plummet. To lower your risk, you can conduct a credit score check to get your credit scores and check out a copy of your credit report so you can readjust your finances and find other ways to invest your money.

• Reduced Financial Aid Qualification- The 529 college savings plan is considered an asset, so being the beneficiary of such a plan will decrease your chances of getting accepted when you apply for student aid. To increase your chances of qualifying for student financial aid, your parents or other benefactors can choose to invest only small amounts of money in the fund, or you can have a friend, relative, or a grandparent be listed as the donor in order to avoid having the plan listed as an asset on your financial aid application.

Although the 529 college savings plan is made to finance your college education, it may not work well for everyone. Before you jump on the investment bandwagon, go through the facts mentioned above to determine whether or not the 529 college savings plan is indeed the right savings plan for you.

Joy Mali is an active finance blogger who is fond of sharing interesting finance management tips to encourage people to manage their personal finances. More specifically, she advocates that people should check credit reports and scores regularly.