Money Talk With Slater

Making Money Across the Board

The Cons of a 529 Plan

While there are advantages to using 529 plans as an investment for college funds, there are some huge cons to consider:

While 529 plans are a great idea to help save up for your child’s college, they have some disadvantages too.

You have to use the money for college
If you don’t use the money you invest in a 529 savings plan for college tuition, you will be penalized when you take out the money to use it for something else. Also, both your state and the federal government will tax the earnings on your account in your present tax bracket.

It could affect your financial aid eligibility
Currently, financial aid eligibility isn’t disturbed much by 529 plans, college savings plans or pre-paid tuition plans since these plans are thought to be part of the parents’ assets in the calculation of the Expected Family Contribution (EFC) toward college costs.

Your investment options are limited
Even though your 529 savings plan is tax-deferred, you might give up the chance to change your mind about where to invest your money. Meaning, if you discover a mutual fund that is growing more in interest than your 529 plan and desire to move your money, then you will be subject to a penalty.

Your investing window may be tight

Many plans have an all-in-one fund that’s just like a target-date fund. It’s created to own more stocks when your child is young and more bonds and cash equivalents, such as money market mutual funds when he or she nears college.

If you have a late start, you could find yourself stuck in a close investing time frame.

Put off saving until your child leaves daycare, for instance, and you’ll have just around 13 years to grow a college fund.

Since you’ll need to get into asset-preservation mode six to seven years before the child starts college, you’ll honestly have only around five years on the front end to put in your portfolio higher-yielding stocks or CDs.

 

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