What are the pros and cons of 529 plans?


Quick Answer

529 college savings plans can be beneficial because they allow parents to set aside a certain amount of money each year to pay for their children's college tuition; however, these plans have stiff penalties if the funds are used for anything other than higher education, and having a 529 plan could affect financial aid eligibility. Another benefit of 529 plans is that interest income is untaxed as long as investors adhere to yearly limits.

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Full Answer

The opportunity for tax-free investing is one of the major benefits of 529 plans, especially since investments can gain interest income and most withdrawals are not taxed as long as the money is used for higher education expenses, including housing, books or tuition.

529 plans also have the benefit of portability. Money saved in one state can be used to pay for college in another, and the funds can even transfer between family members; for example, if one child decides not to go to college, the funds in that child's 529 plan can be used to pay for a sibling's educational expenses.

One major issue with 529 plans is limited investment opportunities. Investors who wish to move their money to a higher-yield investment are subject to a 10 percent penalty.

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