Why should you participate in a 529 plan? Over the past decade, college expenses at
public universities have risen nearly 51%.
High school graduates are more likely to go to college today than in the
past. Of the 3.2 million youth who
graduated from high school from October 2007 to October 2008, 2.2 million (68.6
percent) were attending college in October 2008. College enrollment rates were 71.5 percent
for young women and 65.9 percent for young men. As part of our 529 Plan Series, Eugenia Chavez will outline the benefits and downfalls to saving for College
with the 529 Plan.
Benefits to having
a 529 Savings Plan:
1. Anyone can
contribute to the plan including relatives, friends, etc
account owner (you) of a 529 plan maintains control over the use of the
3. You decide
when the withdrawals are taken out and for what purpose.
4. Since only
one account owner can be named per account, family members may choose to open
their own account for the same beneficiary.
5. You can
transfer the money in the account to another person in your family, if your
child decides he will not attend college.
Family to the beneficiary includes siblings, stepchildren, adopted
children, parents, stepparents, nieces, nephews, aunts, uncles and first
states do not have an age limit for when you must use the money.
7. If you’re
not happy with the current plan you’re in, you can roll it over to another
state plan or option in your current plan.
8. How much
you earn doesn’t affect contribution to the account.
contributions can be as little as $10.
10. You do not
pay taxes on the account’s earnings.
Your investment grows tax-deferred, and your distributions come out
Contributions to the plan qualify for the annual $13,000 gift tax
exclusion ($26,000 for married couples filing jointly).
12. If a
scholarship is received, any money not used can be withdrawn without paying the
10% penalty. The only tax paid is that
on the earnings at your income bracket rate.
13. You can
participate in almost any 529 plan in the US.
14. Some states
offer an income tax deduction or credit based on your contributions into a 529
15. Some states
offer matching grants and other benefits to participants in its 529 plan.
Drawbacks to the
529 Savings Plan:
There are a variety of options to choose from when
investing in 529 Plans. You have
investment options ranging from equity and fixed income funds to age based
allocation strategy funds. The type of
investment is your choice, but the decisions after that resides with the fund
manager. Your only option after the
initial investment choice is to stay or opt out of the fund. And, remember, you can only do that twice per
calendar year. The exception is that
with each new contribution made to the account, you can select a new investment
option for that new contribution in the plan.
The choices you have for investing your 529 account funds are determined by the
plan’s investment manager. But, on the
bright side, many states are broadening their investment options, offering a
wider range of goals and risk levels.
Fees and Expenses:
These can be seen as the biggest drawback to any fund investment. The dreaded fees and expenses you just can’t
seem get away from. Every plan has a fee
embedded somewhere. That is how the
investment manager makes their money.
The best plans keep their total annual costs around 1%. Some plans reduce or waive fees if you keep a
large account balance or participate in an automatic contribution plan or if
you reside in the state sponsoring the plan. Different fees include enrollment fees, annual maintenance fees, asset
management fees, and penalty fees
for unwarranted withdrawals. An
exception to the penalty is if the beneficiary has died or become disabled or
if you withdraw funds not used for college because the beneficiary has received
Other drawbacks to having a 529 plan are that your contributions
aren’t deductible on federal income tax returns and your financial aid rewards
may be reduced.
Lastly, there are
also two different types of savings plans.
College Savings Plans: Direct-sold college savings plan is bough directly
from the plan manager or sponsor without any broker involvement. Therefore, you avoid paying a “load”. It’s usually less expensive because the sales
fee is being omitted.
College Savings Plans: Broker-sold
college savings plans do have “load”.
But, generally this can be reduced by purchasing Class A shares. Many broker-sold 529 plans offer more than
one class of shares, which impose different fees and expenses. More information discussing various class
shares can be found at