College is expensive. There is no denying that and with predictions that College costs could double in the next 15 years, it means that now, more than ever, parents need to think about saving for their child’s college fund sooner rather than later. One of the most popular ways to do this is to take advantage of a 529 plan. But what is a 529 plan and is it worth it? I wanted to explore this in more detail. 

What is a 529 plan?

A 529 plan is a savings option for parents to take advantage of. You can add your money to it and be assured that there will be no federal tax to pay as your college fund savings start to grow. There are no income limits or other stipulations, so applying for a 529 plan is easy and a flexible option to consider.

Each state has a different 529 plan, so even if you live in one state you can pay into a 529 plan in another state if you feel it gives a better return. A little research online will help you to identify the best 529 plans on offer. 

Types of 529 Plans

There are two types of 529 plans: Education savings plans and prepaid tuition plans.

1. Education Savings Plan

A 529 education savings plan is similar to a retirement account except for education instead of retirement! The funds must be used for education expenses but are not limited to higher education college expenses. You can use a 529 plan to pay for Kindergarten through 12th Grade tuition costs and apprenticeship programs. You can also use a 529 plan to pay for up to $10,000 in student loan repayments. 

2. Prepaid Tuition Plan

With a 529 prepaid tuition plan, you can buy college credits at their current price for future use. Since college tuition rates continue to rise, buying college credits ahead of time can definitely reduce college education expenses.

Benefits of 529 Plans

There are some incredible benefits to taking advantage of when it comes to taking on a 529 plan as a way to save for your child’s college education. Here are a few of the benefits you will experience:

• Tax breaks

A 529 plan works similarly to a Roth IRA by investing after-tax contributions into mutual funds or related investments. Earnings in the 529 plan are not taxed and you are also not taxed on withdrawal. 

• You have control

Another great benefit is that you have control over your funds. Some other savings options won’t give you that luxury. The only stipulation is that the funds just be used for educational purposes. 

• There are contribution limits

No contribution limits mean that anyone can invest in a single 529 plan, so if Grandpa and Grandma want to contribute or Aunt Agatha, let them! Individual states may have a maximum contribution limit, but they are usually quite high (>$235,000). 

Disadvantages of 529 Plan

Like with anything there will be some disadvantages to investing in the 529 plan for your child’s college fund. Here are some of those disadvantages to think about:

• Less Financial Aid

Some colleges count the 529 funds into the financial aid that is awarded. This might mean that your child receives less financial aid because of the funds that you have saved in your 529 plan, but the overall impact is usually minimal. 

• Fluctuation

A 529 education savings plan does come with risks as the balance can grow or shrink depending on the market.

• Penalties

There is a 10% penalty for using the 529 funds in a different way. If you decide to withdraw the funds and not use them for education, then there is a 10% penalty tax on the earnings. 

Are 529 Plans worth it?

So is it worth it to invest money into a 529 plan? The truth is that there are a number of advantages to it, and if you are sure that the funds will be used in the right way then it can be very worthwhile to do so. 

Hopefully, this has made you more aware of what the 529 plan is and whether it would be worth it for you and your child’s college fund.

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