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Why a 529 Plan Might Be the Wrong Choice for College Funding

Why a 529 Plan Might Be the Wrong Choice for College Funding

There is a lot of media love given to the 529 college funding plan, but don’t be too quick to jump on the bandwagon. Yes, it is a tax deferred investment for your child or grandchild’s education, but that doesn’t make it the right choice for you. There are four good reasons that you should avoid a 529 plan and opt for another investment instead.

Money Held Hostage

First, the money must be used for college tuition or there is a 10% penalty upon withdraw. Not only will you get the penalty, but both the state and federal tax as well. This includes any excess money that is left in the account after tuition is paid for! So, if you are planning to pay for the entire amount of college through a 529, you’ll end up losing at least 10% of any extra money that could have been placed in another type of plan.

Inflated Assets

The amount of money in a 529 plan could affect financial aid eligibility because it is counted as part of the parents’ assets. All college savings plans or pre-paid tuition plans are considered in calculation of the Expected Family Contribution (EFC) toward college costs.

No Flexibility

Once you have made a decision about where to invest your money with a 529, you are stuck with it. If you happen to find a better investing plan further down the road, you can’t change your investment without taking the 10% penalty for early withdraw.

Long Term Investing Only

There is no advantage to starting a 529 plan in a tax sense. You get no immediate tax credit of any kind. You simply don’t have to pay taxes on the interest as it accumulates. If your student is going to be taking classes in the next few years, there are far better investment options for the short term.

Instead of using the 529 plan, consider a universal life insurance policy. This might seem like a strange choice, but after weighing the options it is the premier choice to grow wealth that can be used for everything from college funding to emergency medical bills. Come talk to us at Palma Financial Services and explore the many options to 529e plans out there.

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