529 plans are more-or-less the default choice for American families as a college savings vehicle. They offer tax-free growth, and encourage children to seek higher education by relieving some (or all) of a post-secondary education’s financial burden for the child. There are other options like the Coverdell ESA (to be discussed in a later post), and more traditional options like a savings account or CD, but when discussing college savings options with parents and grandparents, the 529 is the college savings choice du jour. For more information on 529 plans, you may want to take a look at www.collegesavings.org, which is operated by the State Treasurer’s Association.
There are certainly advantages to saving with the help of a 529 plan, but there’s also no denying that there is a complicated mishmash of state laws that is hard to navigate for most parents or grandparents, and usually requires the help of a financial advisor.
Why are 529 plans so complicated?
First, depending upon the laws of your state, you may have the option to invest in any state’s 529 plan, while the tax rules still apply from your own state. That leaves you with myriad plan choices, in-state and out-of-state, that may have small but significant differences.
In addition to the complexity of deciding on the right 529 plan, another oft-overlooked disadvantage of 529 plans is their revocability. That is to say, the funds the child was depending on for their future can be at risk. A 529 account is the property of the person making the deposits, not the child. The contributor can withdraw from this account at any time (for a penalty), because the account is considered an asset of the contributor. For this reason, in many cases the account can be seized by private creditors or the government (Medicaid is a good example) if the guardian owes a debt.
Finally, if a child decides college isn’t the right fit, or if a life event dictates that a financial need exists in another area, 529 plan account holders are fined 10% and required to pay taxes on the money not used for education. This kind of rigidity might be seen as an advantage for some families, but certainly not all.
At TrustEgg, we believe saving for your child or grandchild’s future should be secure, simple to use, and easy to understand. We also believe a child’s future should be protected, cared for, and flexible. A 529 plan might be the right option for you if you have the time and money to consult with a financial advisor, but it may not be.
Saving for a child’s future should be easy and enjoyable, and it shouldn’t be beyond the reach of families of modest financial means. It should be something you don’t have to stress about understanding, and it should be provided by a company whose sole purpose is to help you provide for your child’s future.
At TrustEgg, we have a good idea of how things are done currently in the savings industry, and we know we can do better. If you’re interested in a new way to build a solid financial future for your children or grandchildren, click on the link below and let us know.
What we know today as ‘529 College Savings Plans’ were introduced to the public in 1996 after being included in the Small Business Job Protection Act of 1996, and later updated (to exclude federal income taxes) by the Economic Growth and Tax Relief Reconciliation Act of 2001. They are named after the IRS section in which it is explained (Internal Revenue Code 26 U.S.C § 529).