It is the classic question parents of young children want to know: Are 529 plans necessary for college? The answer is yes and no. Helpful, right?
Picture this: you are first time parents and you have your precious 4 month old baby in front of you. She is cooing, you are up to your ears in diapers and burp rags. 18 years seems a long way off.
However, you blink and your little 4 month old is 17 (and her siblings are stair stepped behind her) and about to enter her senior year of high school. There isn’t money saved for college because, well, life happened. Should you as a parent panic because you haven’t put any money into 529 college saving plans? After all, a lot of parents simply don't have the extra funds to put to college saving when their children are babies.
Not necessarily. First of all, check out my tips on 8 Ways To Save Money For College. Secondly, there are pros and cons of a 529 plan. Let me break it down for you.
The pros of 529 college plans
529 college savings plans can be used for many different educational expenses such as enrollment or attendance at a college or university. The funds can be used for colleges, universities and many trade schools. It can even be used before college for K-12 expenses (up to $10,000 per year).
If you are using the 529 plan towards a college, university or vocational school:
- tuition and fees
- books and supplies
- room and board
- special needs equipment
The money you put in the account grows tax free. When you withdraw the money for educational purposes, it can be withdrawn tax free. Which is a huge benefit when money is tight and you can keep all your money and it goes where you want it to!
If the grandparents want to give a large gift towards their grandchild’s college future, the money isn’t treated like a gift, which would need to be taxed. Up to $18,000 a year can be gifted for college and put in the plan tax free. (Currently, $36,000 can be gifted from a joint tax filer.)
When your child files a FAFSA, a 529 plan won’t have very much affect on how much financial aid they might receive. A 529 plan is typically viewed as a parent asset not a child’s so the formula is different for calculating needed funds. If your child decides not to go to college, the money can be passed on to an eligible family member for them to use for educational expenses. (Which works great with multiple children!)
Remember, each state has slightly different variations and even each rule has a few rules attached to it. Make sure you properly research all the rules and fine print of a 529 plan.
The Cons of a 529 Plan
All of the above sounds pretty good right? So what could be the disadvantages of a 529 plan? There aren’t many, but here are a few.
If none of your children want to go to school, then the money can be held for up to 10 years to see if they change their minds. If no money is used for educational purposes, the account can be closed and money withdrawn. However, there will be fees owed so you won’t get the full amount back.
It takes money. Yes, that’s right. Sometimes when your children are little, especially if you are a one income family, you don’t have extra cash to put into a college savings plan. Every dollar counts and sometimes saving for the future isn’t there. Don’t worry, there are other ways to pay for college. Every small amount does help so if you only save $500 a year from a tax refund that is still better than not saving at all. We didn’t save anything for our children’s college. I understand the saving dilemma.
Some states require the funds to be for undergraduate studies and not towards masters degrees. Or if it does go for advanced degrees, it will only pay out the undergraduate rate. Be sure to look into that.
Each state has different requirements with their 529 plans so be sure to do a little digging and see what your specific state requires of you.
Summary
529 college saving plans is certainly a helpful way to save for your child’s college and if you start early, even a little at a time, the savings can add up and help your student in their college adventures.
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