529 Account Pros and Cons

First of all, what is a 529 account really? And what advantages will it give me? These are good questions which I will attempt to answer today. A 529 account is a state sponsored plan that allows families to save money towards their children’s (or their own) college education, while being able to invest the money and gain a market return. The best part of the plan is that the money grows on a tax free basis, as long as it is used for education.

The 529 account can be used at any accredited college or university, on anything from tuition and fees, to books, room and board, supplies, etc. needed for college. As I mentioned before, each state has different rules surrounding the 529 account, but you can shop any state’s plan, to suit your needs. The only negative consideration with using a different state’s plan is you may have to pay higher commissions with less investment options available under the proposed 529 account. Let’s take a closer look at some of the key benefits and problems:

Key Benefits

Key Problems

You can contribute up to $11,000/year or $55,000 for five years (can be contributed all in one year)
All monies grow tax free, without withdraw penalty (as long as used for college)
The account holder controls the money, as opposed to the beneficiary
Unlimited number of accounts can be opened, in multiple states, for multiple kids, yourself, even multiple accounts per person

State directed. You only have investment options that the state offers. So shop wisely, choose a state with options that will suit you or your children’s needs
Heavily penalized for early withdrawal, or withdrawal for a purpose outside of education. Typically an automatic 10% penalty, with income taxes assessed for the earnings, and possibly an additional 10% tax added on by the particular state (who do these guys think they are??)
Knowing what state to put your money with. I recommend consulting a financial advisor to weigh the options.

In short, the 529 account can really help folks take advantage of the stock, bond and money markets without suffering the penalties of taxes. Beware that there is a limit of $290,000 cumulative that you can put into a singular account. Almost all folks these days want to help their children with the expenses of college. Even my parents helped me a little with my school, although they really don’t have money. I was appreciative, and if you can maximize the money that you do have and are wanting to put towards your children’s education, the 529 account is for you.