3 Disadvantages of a 529 Plan Every Parent Should Know When Saving for College | Smart Change: Personal Finances
(Stefon Walters)
A 529 plan is a great way for parents and other family members to save for a child’s education. By using a 529 plan, you can ensure that you are intentionally saving for a child’s future while enjoying tax benefits. Money in a 529 plan grows tax-free with tax-free withdrawals for eligible educational expenses. However, 529 plans are not without flaws. Here are three disadvantages of a 529 plan that every parent should be aware of when saving for college.
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1. Investment options may be limited
Unlike a regular brokerage account or Individual Retirement Account (IRA), you have limited investment options with a 529 blueprint. Your state’s chosen plan manager gives you your investment options, which may be limited, especially for more experienced investors who prefer the freedom to choose the investments they want.
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One of the investment options is usually an age-based portfolio, which will adjust account assets as your child ages. The further away your child is from college, the riskier the portfolio will be (more stocks). As your child approaches college age, the wallet will become more conservative and focus more on preserving money rather than taking more risks to make it grow.
There will also usually be a static wallet option, which remains the same unless you choose to do so manually. reallocate investments. Some will include target risk portfolios based on the level of risk you are willing to take; for example, “conservative”, “moderate growth” or “aggressive growth”. Individual portfolios will mirror certain indices or other mutual funds. For example, Fidelity’s 529 plans offer the options “Fidelity 500 Index Portfolio” and “International Index Portfolio”.
2. It is used to determine eligibility for aid
When your child completes their Free Application for Federal Student Aid (FAFSA), your family’s total financial situation is considered, including the 529 blueprint. Your child’s Expected Family Contribution (EFC) — used to determine how much you can pay out of pocket for school — will increase with the plan’s total of 529. The higher your EFC, the less your child will receive in federal grants, subsidized loans and work-study opportunities.
Since a 529 plan is considered an asset, the owner of the account is important. If the account is in a parent’s name, up to 5.64% of the amount saved is counted towards your child’s EFC. However, if the account is in the child’s name, up to 20% is counted.
3. It’s easy to trigger penalties
The purpose of a 529 plan is to pay for qualified college fees. However, it is important to know what school-related expenses qualify. You can use your 529 plan to pay for the following:
- Tuition and Fees.
- Books and supplies.
- A computer and software.
- Accommodation and meals (if the student is enrolled at least half-time).
- Student loans (up to $10,000 in a lifetime).
Unfortunately, transportation costs—such as air travel or gas to and from campus—are not covered, nor are expenses such as college registrations and test fees. , extracurricular activities or health insurance. If you make a withdrawal to pay for an ineligible expense, the IRS will consider it income and tax it accordingly, with a 10% fee. Not knowing which expenses are eligible for 529 funds can lead to an unexpected tax bill and cost you more than you expected.
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