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An Introduction to 529 Plans; The Good the Bad and the Inconsequential

Whether your child is 15 months or 15 years old—now is the time to begin developing a savings strategy for college. Higher education may seem an expensive luxury, but it is also incontrovertibly a necessity. The workplace has become increasingly competitive and even entry level positions can be difficult to secure without a diploma. Fortunately, the federal government identified this dilemma faced by millions of parents throughout the U.S. and authorized the creation of a program designed to ease the burden of paying for college by helping parents get a head start. 529 tuitions savings plans were the result of the government’s collaborative effort to promote higher education by simplifying the process of creating a college fund and maximizing its efficiency.

An Overview of 529 Benefits

These plans are named after section 529 of the Internal Revenue Code and they are designed to help parents begin saving for college by providing investment option that allows them to withdraw funds for qualified educational expenses, tax free. The investment strategies, tax benefits, and incentives offered by 529 plans vary by state so it is important to consider the advantages of your own state as well as others. Some plans allow you to contribute as little as $5 a month so everyone can afford to push at least a small amount of their mad money—without excuse—into one of these investment plans. Tax deferred growth on deposits, protection from bankruptcy, and the ability to use funds at almost any college in the U.S. as well as hundreds of other institutions abroad, are some of the benefits of the 529 option.

Costs Worth Considering

State sponsored 529 plans can be a great option for parents who are looking for somewhere besides their sock drawer to stuff their extra cash, but they aren’t flawless. Every 529 plan is different and some are in fact better than others. The federal government has outlined the fundamental qualities of an approved plan, but the nitty gritty details—the details that impact your pocket book—are left to be determined by individual states and the sponsors of each plan. Because of the differences between the plans, it is wise to review as many as possible before determining which plan is best for you. In some states residency determines eligibility and the ease of access to the benefits received by the plans, while others allow enrollment to cross state lines. There are often additional fees and tax penalties for participants who choose a plan outside of their state that could offset any benefits afforded by that particular plan, as such, it is critical that these penalties be drawn into light and thoroughly examined.

One notable disadvantage to the 529 program (which ironically is also one of its benefits), is that the funds allocated into a 529 tuition savings account are set aside for the sole purpose of paying for qualified higher education expenses. This is a great benefit for those parents who have faithful, fail proof children equipped with a 100% satisfaction guarantee; but, for those parents with less than perfect kids—kids who don’t always follow the plans laid out for them—the benefits of 529 savings are annihilated by tax penalties when the funds are not used for educational expenses. There is little way to get around this issue, unless of course, you are yourself a child of the tough love movement and opt to have little 5 year old Sam sign an affidavit that guarantees his future attendance at a specified 4-year university...or else.

When you are considering a 529 plan, beware of fees. Estimated underlying fund expenses, state fees, program manager fees, miscellaneous fees, annual distribution fees, total annual asset based fees, and account maintenance costs are all associated with 529 accounts. Fees, like benefits and incentives vary by state, so weigh your options carefully.

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