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Should You Consider A 529 Plan?

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August 28, 2022

I recently spent time with my daughter and niece at a girl scout camp. To save money on travel, our troop decided to carpool. As I rode with another mom and her daughter to and from camp, we talked about the typical topics and things of life. Our conversation arrived at college expenses because my son graduated from high school and would be starting his first year of college this fall. Preparing for the expense of college may not be the forefront of your thoughts, however getting an early start on saving will help you stress less.

What exactly is a 529 plan? A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. There are two different types of 529 plans available to choose both offering tax savings for colleges in the US and Abroad but are different from state to state. Prepaid tuition plans let you or an account holder purchase credits at participating colleges and universities for future tuition and mandatory costs. These typically do not include future room and board costs. Education savings plan lets you save for all future higher education costs including future room and board.

Many questions can arise about understanding 529 plans however 529 plans are a great way to save for college but there are pros and cons to consider.

Pros

  • 529 plans offer a tax-advantaged way to save for college. Contributions to a 529 plan are typically not taxed, and any earnings on the plan grow tax-free.
  • Distributions from a 529 plan are also typically tax-free, if they are used to pay for qualified education expenses.
  • 529 plans can be used to save for college expenses for any family member, not just the account holder. There are no income restrictions for contributors or beneficiaries of a 529 plan.
  • Most states offer their own 529 plans, which may offer additional tax benefits or other incentives, like matching contributions.
  • The funds in a 529 plan can be used at any eligible college or university in the country (and some abroad).

Cons

  • One downside of 529 plans is that if the account holder withdraws funds for reasons other than qualified education expenses, they will have to pay taxes on the earnings plus a 10% penalty.
  • A downside of 529 plans is that if the account holder doesn't use all of the funds in the account, they may have to pay taxes and penalties on the unused amount when they take distributions later on.
  • Some families may find that they don't have enough money saved up in a 529 plan to cover all their child's college costs.
  • If you switch schools or decide to attend a different type of school than what was originally planned (pre-paid 529), your 529 plan may not cover all your costs.
  • 529 plan ownership could affect federal financial aid

This is not a complete list of Pros/Cons and ultimately it comes down to how you see fit to best prepare for your child's future education. 529 Plans are a great way to save for college education expenses while also receiving special tax benefits. Contact your Private CFO today to learn how to enroll in a 529 Plan and start saving for your child's college expenses.


If you would like to receive more information on making smart money moves for your future, be sure to contact us today!

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About the author

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NouaChi Vang

Vice President, Private CFO®

I grew up in California. My family moved to North Carolina where I attended UNCC and obtained a degree in Economics. I received my MBA from University of Phoenix and studied for my CFP certification with Boston University. I am married, have 4 kids, and currently living in Minnesota. I enjoy spending time with my family, hiking, playing chess, tennis and singing karaoke.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. Investor Disclosures: https://bit.ly/KF-Disclosures

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Background and qualification information is available at FINRA's BrokerCheck website.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. https://Bit.ly/KF-Disclosures

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