The Pros and CONS of 529 College Savings Plans

According to The College Board, total annual charges for tuition, fees, and room and board for full-time college students have topped $12,700 at the average four-year public university and $30,300 at the average four-year private college. With numbers like that, it’s easy to see why it’s so important to start saving while your children are young. One of the best ways to do that is with a Section 529 qualified College Savings Plan, reports the Wisconsin Institute of CPAs.

While it’s difficult to find fault with 529 plans, it’s important to understand the pros and cons associated with this investment. The following information should help.

PRO: EASY TO OPEN AND MANAGE

Everyone is eligible. There are no income or age restrictions, and many plans have initial contribution amounts of less than $100. You choose a state’s plan and select your investment option, and the state or a third party, such as an investment firm, manages your funds.

PRO: Favorable tax treatment

Earnings on funds invested in a 529 plan grow tax free while in the plan. Distributions are tax free, as long as the proceeds are used for qualified higher-education expenses. Qualified expenses include tuition, fees, books, and eligible room and board costs at an eligible educational institution. While contributions to 529 plans are not federally tax deductible, some states allow a full or partial deduction for your contribution. The Pension Protection Act of 2006 has permanently extended Section 529 Plan provisions that were scheduled to expire at the end of 2010.

PRO: Account flexibility

Anyone can open an account and the proceeds can go towards any accredited educational institution, whether it’s public, private, two-year or four-year. There are no income limitations and there is no requirement that you pick the state in which you reside, although there may be some advantages to doing so. Keep in mind, too, that the beneficiary does not need to attend a school in the state of the chosen plan.

PRO: HIGH CONTRIBUTION LIMITS

Each state determines its own lifetime contribution limit, but maximums are generous, with some exceeding $300,000 per beneficiary.

PRO: LIMITED IMPACT ON FINANCIAL AID

Generally, money in the student’s name has a larger impact on financial aid than money in the parent’s name, since colleges expect students to contribute a larger portion of their assets to the tuition bill. Since assets in a 529 plan are considered the property of the person(s) who opened the account, there is less of an impact on financial aid.

PRO: TRANSFERABLE

          If the beneficiary of a 529 plan decides not to attend college, the account proceeds are transferable to another member in the beneficiary’s family.

PRO: BETTER Account control

Unlike other custodian accounts, with a 529 plan, the beneficiary does not gain control of the money when he or she reaches the age of majority (18 or 21 depending on where you live). The account owner decides when distributions are made, and how the funds will be used.

CON: PENALTIES FOR NON-EDUCATION USES

If you withdraw money from a 529 plan and do not use it on qualified college expenses, be prepared to pay income taxes on the withdrawal along with a 10 percent penalty on earnings.

CON: LIMITED INVESTMENT OPTIONS

With a 529 plan, you must choose from among the mutual fund-type investments offered by the plan, so you can’t pick individual stocks, bonds, or other investments. Another caveat is that only cash contributions are accepted which means you can’t contribute stocks, bonds or mutual funds to a 529 plan without first liquidating them.

CON: LIMITED INVESTMENT AND PLAN SWITCHES

Under current law, once you've chosen your 529 plan’s investments, you can't make a change for 12 months. If you're not happy with the 529 plan itself, you can transfer to another state’s plan - but just once a year.

CON: Fees and expenses

          Expect to pay enrollment, annual maintenance and/or fund expense fees.

529 College Savings Plan can help you boost your education savings.  To decide on the plan that’s right for you, consult with a CPA. He or she can help you determine the best strategy for saving for you child’s education.

The WICPA is the premier professional organization for Wisconsin CPAs, with more than 8,200 members working in public accounting, industry, government and education.  Please include the CPA credential in source identification. Like other professionals, certified public accountants are required to obtain additional education, take a rigorous exam and become certified. Please identify all CPAs by including the credential with their names. This identification enhances the accuracy and credibility of your reporting.

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Produced in cooperation with the AICPA

©2006 The American Institute of Certified Public Accountants

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