| Hi Taylor
- I've been looking at the different ways I can put money aside for
my kid's education, and it seems like the 529 plan is the best bet.
Am I missing anything? - Wendy
Hi Wendy - It's true that a 529 offers the most incentives when
it comes to saving for college. The only drawback is that you can't
put the money toward anything else, so you're taking a pretty big
leap of faith if you start funding the account when your child is
still in elementary school. It might be the right choice, but it's
still worth weighing all the pros and cons.
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
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.
| In the right
situation, a 529 plan is probably the best option. You just have to
give some serious thought to whether or not that's your situation.
Thanks for asking and good luck!
© Taylor Kovar
June 8, 2020
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