Is a 529 Plan The Best Way to Save for College?

1. Pros. A tax-free account is usually not a bad thing. A tax-free account with high contribution limits is almost unheard of. Dollar for dollar, you won't find a better way to save up a lot of money without having the IRS skim some off the top. A 529 also requires little work on your end, so you don't have to do much other than put in cash and let the money grow. If you start early enough, you can save yourself a lot of stress when it comes time to pay those super high tuition fees.

2. Cons. The big problem is a lack of flexibility when it comes to how the money gets used. If your son or daughter doesn't go to college, any withdrawal unrelated to education is subject to taxation and a 10% penalty on all earnings. If you've been putting $20,000 aside each year and suddenly have to cover 10 years of taxes, the loss might just make you faint. You also have to be cautious when choosing your plan, as some come with higher fees than others. If the investment options are limited and the fees are excessive, the tax-free part doesn't matter quite as much.

3. Alternatives. It takes a bit of a mindset shift, but a 529 plan isn't the only way to save for college. Some people put money into a Roth IRA, as qualified education expenses don't incur the early withdrawal penalty. You can also start a custodial account, which has tax advantages without requiring that the funds go toward education. If you feel comfortable with the stock market, you can put the funds into a brokerage account and let the money grow and earn dividends. None of these options have the combination of high contribution limits and tax-free growth, but the flexibility of putting the money toward starting a business or keeping the funds for retirement has a lot of appeal.