Is A 529 Plan Really Worth It?

Why is a 529 plan a bad idea?

A 529 plan could mean less financial aid.

The largest drawback to a 529 plan is that colleges consider it when deciding on financial aid.

This means your child could receive less financial aid than you might otherwise need..

Can you lose money in a 529 plan?

If you invest in a 529 college savings plan, and that plan puts your money in a variety of investments as most do, you can lose money. That’s because these investments, ranging from stocks to bonds, can go down in value. It’s just like your retirement accounts.

What’s better than a 529 plan?

A 529 savings plan is one of the best ways to save for a child’s college education, but there are alternatives. … Custodial UGMA and UTMA accounts can be used for purposes other than education. Roth IRAs have tax advantages similar to 529 plans and they don’t count as assets for financial aid purposes.

Is a 529 better than a savings account?

529 plans offer a greater return on investment along with the greater complexity and greater risk of loss. Other important benefits of 529 plans include better financial aid and tax treatment of the savings.

Can I use my child’s 529 for myself?

Regardless of your age, you can set up a Section 529 plan for yourself to fund educational expenses now or in the future. … You can apply the funds for tuition, books, fees and even a computer, as long as it is used to further your studies.

How much can you withdraw from 529 per year?

​529 Participants may take up to $10,000 in distributions tax free per beneficiary for tuition expenses incurred with the enrollment or attendance of the designated beneficiary at a public, private, or religious elementary or secondary school per taxable year.

What are the disadvantages of 529 plan?

Disadvantages of using a 529 plan to save for college529 plan funds must be spent on qualified expenses to avoid tax and penalty. Non-qualified distributions are subject to income tax and a 10% penalty on the earnings portion of the distribution. … 529 plans owned by a third-party can hurt financial aid eligibility.

What happens to 529 if child does not go to college?

If assets in a 529 are used for something other than qualified education expenses, you’ll have to pay both federal income taxes and a 10 percent penalty on the earnings. (An interesting side note is that if the beneficiary gets a full scholarship to college, the penalty for taking the cash is waived.)

Do I need 529 for each child?

While it’s technically possible to use one 529 plan for multiple children, rather than making things simpler, it actually makes them more complicated. From beneficiary rules to investment strategies to ultimate fairness, having a separate 529 account for each child is the preferred way to go.

Is Roth IRA better than 529?

A Roth IRA offers fewer tax benefits than a 529 plan IF the money is used for higher education. 529 plans allow for tax-free withdrawals of earnings, while Roth IRAs do not (at least, not until you’re age 59-1/2). Some states offer income tax deductions for contributions to a 529 plan. Roth IRAs never get this benefit.

When a 529 plan is not the best college savings option?

Funds from a 529 plan that are not used for qualifying college expenses are subject to a 10% penalty and any gains are taxed at the parent’s marginal tax rate, which can be as high as 37% for tax year 2020 . If the beneficiary of the 529 plan receives a scholarship, the 10% penalty is waived.

What can I do with leftover 529 money?

6 ways to spend leftover 529 plan moneyTransfer the 529 plan funds to another beneficiary. … Save the 529 plan funds for your child’s future educational needs. … Use the money to make student loan payments. … Save the 529 plan for a grandchild. … Take advantage of penalty-free scholarship withdrawals.More items…•

What happens if you don’t use money in a 529 plan?

If you don’t use the 529 funds for eligible expenses, you usually have to pay taxes and a 10% penalty on the earnings portion of the withdrawals. … For more information about the rules, see the “qualified tuition program” section of IRS Publication 970, “Tax Benefits for Education.”

What is the best college savings account?

But 529s and ESAs are generally considered better choices for college savings because of their tax advantages. There are two types of tax-advantaged college savings plans designed to help parents finance education: 529 Plans and Education Savings Accounts (also known as ESAs or Coverdell accounts).

Is a 529 better than a mutual fund?

The income tax bite on your mutual funds can have a significant negative impact on investment returns over time. The Roth IRA and 529 plans offer the advantage of tax-deferred earnings as well as tax-free qualified distributions down the road. … The ability to change investments is also more restricted in a 529 plan.