With so many options available, it can be difficult to choose the best college savings plan for your child. The section 529 plan, also called the Qualified Tuition Program, is one method you can use to save for the cost of higher education. However, Section 529 Plans have both advantages and disadvantages.
About Section 529 Plans
A section 529 plan is an investment account established by a state or institution or higher education. Section 529 plans allow you and any other donor to make contributions toward a beneficiary's future education expenses. The investment grows tax-deferred, and no federal income taxes are due on distributions as long as you use them to pay qualifying higher education expenses. Qualifying higher education expenses include tuition and educational fees, required equipment, school supplies, books, Internet access, computer technology, special needs services and room and board.
Lack of Control
After you select an investment option for your section 529 plan, you cannot change it easily. You can roll the plan over only once per year, regardless of the results of your investment. Furthermore, few section 529 plans can provide investors with detailed information about the plan's past performance, thus making it more difficult to choose a successful plan initially.
Most section 529 plans require the investor to pay a fee to open the plan, as well as regular fees to maintain it. Though section 529 plans you set up on your own typically involve less fees than those sold by an investment adviser or broker, these fees still cut into the account's net earnings.
If you withdraw money from a section 529 plan and use it for costs that aren't qualifying educational expenses, you must pay income tax on the amount you withdraw. You must also pay a 10 percent penalty on the amount of the distribution. Only higher-education expenses qualify for tax benefits. You won't qualify for tax benefits if you use funds from the plan to cover the costs of education at the primary or secondary levels.
Effect on Financial Aid
A student with access to a section 529 plan may not qualify for certain types of financial aid. Many financial aid programs that determine eligibility based on financial need consider section 529 plans to be a countable resource. The higher the balance of the section 529 plan, the more effect the plan will have on financial aid eligibility. However, students with access to these plans may still qualify for merit-based financial assistance.
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