Pros and Cons to a 529 Plan

A 529 plan is a type of account that is designed to help parents save for college tuition for their children. This type of account comes with several advantages and disadvantages. Here are a few of the pros and cons of the college 529 plan.

Pros

One of the biggest advantages of the 529 plan is that it provides tax benefits. With this type of account, you are going to fund it with after-tax contributions. You will then be allowed to invest the money into different securities. When the investments bring in a return, you are going to be able to avoid paying taxes on that amount. The gains are allowed to continue to compound tax-free and then you will be able to pay for the college expenses directly out of the plan. In addition to getting federal tax breaks, some states also allow you to get a deduction for making a contribution to the plan.

Another big advantage of this type of account is that the donor gets to retain control of the funds. With other types of college savings accounts, the student is going to gain control of the money once they reach a certain age. Many people do not want to get a large amount of money to a teenager and prefer the control that comes with a 529 plan.

With this type of college savings plan, it does not matter what state you go to school in. The student could potentially choose anywhere that they want to attend school and they could use funds from the 529 plan. Other plans require the student to stay within their home state.

This type of plan also has very large contribution limits. In most cases, you can put as much as $300,000 into the account without any issues. Other plans only allow for a few thousand dollars to be deposited.

Cons

Even though this investment is considered to be beneficial, there are a few potential drawbacks that you should be aware of. For one thing, you are going to have to pay fees for this service. When you put money into this type of account, you are going to need to invest it in order to receive benefits. When you invest, you are going to have to pay commissions and fees just like you would with any other type of investment account. Over the long-term, these fees can add up to substantial amounts.

Another potential problem with this type of account is that the state that administers your plan could decide to change providers. When this happens, you are going to have to cash out your existing investments and choose new investments to put your money into. This can be a burden and could potentially cost you some nice returns depending on what you are invested in.

In some cases, the choices that you have to invest in can be limited. This will make it where you have to choose between only a few options that you may not be comfortable with.

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