Approximately 2/3 of American high schoolers head off to college after graduating. That means there's a good chance that at least one of your children will enroll in a community college or 4-year university. And with average annual tuition ranging from $9,400-$37,600, it's essential to start saving early. But what's the wisest way to invest in your child's future? For many parents, a 529 plan is the answer. Here's a breakdown of what a 529 college savings plan is and the pros and cons of establishing a 529 to save for college.
529 Plans At-a-Glance
Although 529 plans can be designated as college savings plans or prepaid tuition, today, we are specifically looking at college savings plans. These plans operate similarly to 401(k) or IRA plans by allowing owners to invest after-tax contributions into investments or mutual funds. The tax-advantaged plan funds are strictly to be used for the cost of K-12 tuition or college education.
Perks of 529 College Plans
There's a reason why 529 plans are so popular. Here are the perks:
Tax advantages: Of all college savings plans, 529s are the only ones to allow for state tax benefits. Of course, each plan will differ, but many state plans offer income tax deductions or credits, and most don't count contributions as taxable income.
Low maintenance: You can be as involved or uninvolved as you'd like to be in a 529 plan. Many parents love that they can create a plan, set up automatic deductions, and forget about it.
No impact on financial aid: No one should be punished for planning for the future. When applying for scholarships and financial aid, the money in your child's 529 plan should not impact their eligibility. This is because parent and student-owned plans don't qualify as income on the FAFSA.
High contribution limits: While other investment plans set caps on annual contribution limits, 529 plans do not. Additionally, most plans have high aggregate limits.
Lots of plan options: Each state has its own plan, but you can choose any state's 529, regardless of where you live or where your child plans to attend college.
Drawbacks of 529 College Plans
Of course, you'll find some drawbacks to establishing a 529 plan. Here are a few things to consider:
Strict rules: The funds invested in a 529 plan can be used only for specific things like tuition, school fees, books and supplies, and sometimes lodging. If every dollar withdrawn from an account can't be reconciled against one of these approved expenses, you may get hit with a withdrawal penalty.
Limited investment options: If you're someone who likes to have a lot of control when it comes to investment options, a 529 may not be the right fit for you. Account owners are required to choose from a set menu of options specifically offered by the individual plan.
Fees: Every 529 plan will come with annual fees, some greater than others. Talking with an advisor and researching your options will help you find an affordable 529 plan that will help you maximize your investment.
Lots of plan options: Yes, this can be a perk, but it can also be a drawback! When you're able to choose from so many different plans, it's easy to get confused and overwhelmed. We really urge parents to take advantage of our experts to get the best advice on which plan to go with.
Final Thoughts
There are plenty of perks associated with 529 college savings plans, but there are also important things to consider. That's why it's in your interest to work with a professional who can help you to evaluate your individual goals and needs and to pick the right course of action for your financial strategy. The expert Rally advisors are always happy to help. Reach out today!