529 plans
A common option used for paying for college and educational expenses is a 529 plan, which is an education savings plan sponsored by a state or state agency. A 529 plan can be purchased not only by parents, but also grandparents and other relatives. When you purchase a 529 plan, your earnings grow tax-deferred and any qualified withdrawals are tax-free. As a child reaches college age, he or she can use the accumulated funds to pay for qualified expenses including tuition, room and board, books and computer equipment. While 529 plans have many advantages and can be useful in preparing for the future, there are limitations to consider as well.
Limitations of 529 plans include:
- An account can lose value due to market downturns
- You pay penalties if the money is not used for education purposes
- The account earnings can affect an application for financial aid
- Many plans include yearly fees and administrative costs
Plus, if your child receives a scholarship, you will likely only need a portion of the money saved in your 529 plan. If you end up with remaining funds or if a child decides not to enroll in school, the beneficiary can be changed to another family member. However, if you do not have other family members looking to attend, you may have to pay significant penalties to withdraw your savings for other purposes, depending on the rules of your state's 529 plan.
In next blogpost, we will discuss why annuity could be a viable alternative to 529 to pay for college expenses.