What are the pros and cons of using 529 college savings plans?


Quick Answer

Advantages of 529 college savings plans include the opportunity for tax-free savings for qualified higher education expenses and the diversity of plan options, explains U.S. News & World Report. Among the disadvantages are the restrictions on owners and beneficiaries, the fees for plan maintenance and the penalties if owners spend plan funds for noneducational expenses. Additionally, funds in 529 plans count as parental assets and reduce eligibility for other forms of financial aid, states the U.S. Securities and Exchange Commission.

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Full Answer

Owners of 529 plans do not pay federal taxes on plan earnings as long as they use the income to pay for eligible college expenses, reports the IRS. Many states also waive state taxes on plan earnings and offer additional financial incentives to state residents. Qualified expenses include tuition, fees, supplies, and room and board, according to the U.S. Securities and Exchange Commission. People can invest in college savings plans in any state, while prepaid tuition plans that allow plan owners to lock in tuition prices for future enrollment generally require state residency.

A 529 account can have only one owner and one beneficiary, although one owner can have several separate accounts, according to U.S. News & World Report. Each state has limits on maximum contributions per beneficiary. Costs of 529 plans vary, but they may include fees for advisor assistance, plan management, maintenance, administration and underlying investments.

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