A 529 plan is GOOD FOR YOU if you are the following type of person (financial DNA):
1. You like systems to make you save:direct deposits or automatic contributions each month or year
2. You like compartmentalizing your financial life: x for college, y for retirement, z is for emergencies,
3. You don’t want to do the actual investing. You’re happy to let someone else invest for you even if you could get another 1-2% if you invested with someone else or managed the investments yourself
4. You like structure and do your homework at the outset (so does your child so he/she is probably going to college). You figure out which plan is best for you early and don’t want to worry about it again.
A 529 plan is BAD for you if you are the following type of person (financial DNA):
1. You can’t cede control to anyone and need to be in there picking stocks and watching the market
2. You’re all about return. You don’t mind paying a little tax as long as you’ve optimized return.
3. Your child has many talents. He may end up a pro snowboarder, never going to college.
4. Fees make your skin crawl especially since you can do it better.
Everybody likes tables, right? If you see a * that means CHECK YOUR SPECIFIC PLAN FOR DETAILS. Also, I’m talking about 529 Savings plans here not pre-paid plans (more on that later).
Next week, I will talk about the difference between “savings” 529s and “pre-paid” plans, and after that, I will talk about UGMA/UTMAs, Coverdell ESAs, Roth IRAs and other ways to save. After all that, I will do a comparison and give some guidance on which one or combination might be right for your family.
|529 PROS||529 CONS|
|1. You are deliberately saving for college!!! Yay you!!!||1. 529 plan fees can be BIG|
|2. You are deliberately saving for college!!! Yay you!!||2. 529 plan fees can be BIG|
|3. You are deliberately saving for college!!! Yay you!!||3. 529 plan fees can be BIG|
|Bankruptcy protection for deposits older than 2 yrs||It’s hard to make a sizable return after fees in the current investment climate (1-3%)|
|No Federal tax on growth/earnings on deposits||You have no say in how your funds are invested once you choose a plan and an investment option|
|No limit on deposit amounts or times to deposit – but over $13,000 in 1 yr and you may trigger Generation Skipping Transfer (consult your tax preparer)||Some plans can be overly exposed to stocks (higher risk) when your child is close to needing the money (need lower risk)|
|No age limit for beneficiary in most states*||Plans can lose money in a downturn wiping out a lot of your college savings|
|Some states* offer a tax break on state tax for the account’s growth/earnings||You pay 10% penalty if you need to use the funds for something else or your beneficiary does not go to college|
|Discipline: You can’t take the money out without penalties and spend it on a boat||You can only change beneficiaries once per year*|
|Other people can contribute to the plan – that means you grandpa and grandma!||529 funds can’t be used for anything besides post-secondary schooling. Good luck with private school (k-12)|
|You can change beneficiaries if one child decides not to go to college|
|Funds can be used at any accredited post-secondary institution*|
|Though there are restrictions on use, 529 funds can be used for books/room/board/tuition (all the basics)|
|Professionally managed funds, so you don’t have to worry about making investment decisions|
|For people who like compartments or checking boxes, you can only use 529 funds for college so that box is checked|
|No limit on contributions based on Adjusted Gross Income|
|Can be used internationally as long as post-secondary institution meets IRS criteria (check IRS.gov)|
|Direct Plans can save you money on fees compared to broker sold plans|