Penalty for Non-qualified Distribution
Distributions from a 529 plan for uses other than qualified education expenses may result in tax ramifications. In the event of a non-qualified distribution, the distribution is subject to ordinary income tax, as well as a 10% penalty on the gain.
What if a 529 Plan saver lost job or had a family emergency and had to access funds from the 529 plan? Not only the person already paid tax on the money before it was contributed to the plan, but now also have to pay tax on a portion of the earnings withdrawn, plus a 10% penalty.
Subject to Market Risk
529 plan assets are often invested in accounts that are subject to the risk of the market. What if the child started college in 2009 after the market crashed?
What If Accidents Happe
If disabled for 90 days, would the 529 plan saver be able to cover living expenses and continue contributing to a 529 plan? What if those 90 days turned into 2 years? This may look like a stretch, but it is not. The average long term disability absence is 2.5 years! 529 Plans offer no options to fund the plan in the event of disability.
Impact on Financial Aid
When applying for financial aid, a 529 plan is identified by FAFSA as an asset of the parents, if the parent is the account owner, and is recognized in the family contribution level toward college costs. The higher dollar amount in a 529 plan may mean a higher family contribution level and a lower amount of financial aid that may be obtained.
In our next two blog posts, we will evaluate Whole Life as a 529 Plan alternative and which market segment is Whole Life best suited for.