Investing for College: Pros and Cons of 529 College Savings PlansSubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on October 20th, 2017
Investing for College: Are 529 Plans Still a Good Idea?
Yes. The value of tax deferred growth and tax free distributions, if used for qualified educational expenses, is a powerful savings plan. Other advantages include high contribution limits, unlimited participation regardless of income level, and professional money management by designated financial companies who are responsible for managing the plan’s underlying investment portfolios.
Does it matter who is the owner of the 529 plan?
Yes, if the grandparents are the owners of the assets, 529 plans offer an excellent estate planning advantage in the form of accelerated gifting. This can be a favorable way for grandparents to contribute to their grandchildren’s education. Specifically, individuals can make a lump-sum gift to a 529 plan of up to $70,000 ($140,000 for married couples) and avoid gift tax; provided the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years.
Are there drawbacks to 529 Savings Plans?
Since age-based 529 plans are sold in conservative, moderate, and aggressive options that contain a variety of investments, it’s important for potential 529 investors to rate their overall risk tolerances. Age-based 529 plans tend to move toward a conservative allocation around the age of 14. It may not make sense to begin a plan for a child at that age. However, there are strategies that can be implemented to change beneficiaries to younger children to allow for longer term growth.
Are there different types of 529 plans?
There are two basic types: prepaid tuition plans and savings plans. And each state has its own plan. Each is somewhat unique. States are permitted to offer both types. A qualified education institution can only offer a prepaid tuition type 529 plan. Similar to a 529 college savings plan, 529 ABLE accounts are savings accounts administered by the states. Money can be withdrawn tax-free when the funds are used to pay for qualified disability expenses.
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