Money Smart Kids
Pros and Cons of 529 College-Savings Plans
For most families, 529 plans are the mainstay among college-savings programs, and for very good reasons. But there are a few drawbacks.
By Janet Bodnar, Editor, Kiplinger's Personal Finance
June 16, 2005
Help! I have two kids, ages 5 and 7, and want to start a college fund for them. What would be most beneficial: an education savings account, a 529 plan or a Roth IRA? Please define all of the above.
Last week I discussed Coverdell education savings accounts and Roth IRAs; this week I'll take on state-sponsored 529 plans.
For most families, 529 plans are the mainstay among college-savings programs, and for very good reasons. You can open a 529 account with as little as $25 or make a six-figure contribution. There are no income restrictions that shut out high earners, as there are with Coverdell accounts.
Plus, more than half the states and the District of Columbia allow parents to take a tax deduction or credit for all or part of their contributions to their home state's 529 plan. If you don't like your state's offering, you can invest in any other state's plan. You can use the money at any accredited college in the U.S., as well as many schools abroad.
The plans let you put your college savings on autopilot -- a boon if you're reluctant to choose and monitor your own investments. And you can generally pick an age-based portfolio that switches to a more conservative mix as your child gets older.
As long as withdrawals are used for qualified expenses -- college tuition, fees, room and board, books and supplies -- 529 earnings are tax-free. But therein lies the first of several glitches. The legislation that grants 529s tax-free status expires after 2010. It's anticipated that the law will eventually become permanent, but Congress is dragging its heels.
Also, trusting someone else to manage your investments has its downside. Investment selections may be limited. States could switch the companies that administer their plans, meaning your money would be moved into entirely new investments.
And fees can be high. Even in reasonably priced plans, expenses are higher than if you invested in equivalent mutual funds on your own. In some cases, they're downright egregious.
To compare plan fees, tax benefits and underlying investments, and to see a listing of Kiplinger's favorite 529 plans, visit our database.
In the end, you can't really go wrong with any college-savings vehicle. Choose the one that's most in sync with your investing style and needs.
Coming soon: Answers to more of your college-savings questions
