Are there disadvantages to 529 college plans?
I am considering our alternatives to start saving for our son and it looks like the only option is to use a 529 plan, is that correct? Is this the best way to start saving for college and what are the disadvantages? Thank you
There are some alternatives such as the Coverdell Education Savings Account which has very serious limits to contributions. Or you can help your child through an established custodial account (UTMA/UGMA) however beware if the child does not choose to go to college or drops out you cannot take take that money back it was a “gift”.
Honestly when comparing to the alternatives I don’t see many disadvantages to the 529 plan. However do keep in mind that you are probably better off maximizing your benefits on your Roth IRAs before you get too fancy with other types of accounts. Here is a great resource www.scholars-choice.com
Let me know if you a have questions or if this helped.
529 plans are great vehicles to fund higher education the alternative is the coverdale but as it does have its limitations. People have used qualified money such as 401k and traditional Ira as well as Roth Iras but there is a flaw in this plan in it negatively effects your retirement fund and could effect your taxes. The ability to fund the 529 plans is greater than any qualified plan but it there is the 10% penalty if it is not used for qualifying expenses as well as some tax implications.
In addition to the above answers, each state has their own 529 plan (or set of plans) and tax consequences for investing in each. From an investment standpoint, there are many options to fit your investor profile which an advisor can help you determine. From a tax standpoint, investing in your home state’s 529 plan may be more beneficial than an outside state’s 529. A tax advisor can help you determine this.