Weighing the Pros and Cons of 529 College Savings Plans

A soldier looks at paperwork while reuniting with his family.
An Army soldier reviews paperwork with his family after coming home from deployment on Fort Bragg, N.C., on Dec. 12, 2022. (Sgt. Daniel Ramos/Army)

The national conversation regarding college, its cost and paying for it has focused mainly on loan forgiveness over the past couple of years. At an event a couple of weeks ago, I had a conversation with a new parent struggling to determine the best approach to college for her young child in the context of all that's happening.

Should she even dedicate a slice of her limited resources to a goal surrounded by so much uncertainty? What's the "right" answer?

The right answer is to save!

I'll start there because the most important, and often most difficult, component of any savings plan is not deciding where to save, what investments to choose or which program you'll use; it's doing the grunt work -- the saving. That said, if the current purpose of your savings is to pay for college, a 529 college savings plan is worth a look.

For my family, the plans made a lot of sense, but you'll have to decide whether that's true for you. To help with that decision, here are what I consider to be some of the top pros and cons of 529 plans.

The Pros

While not an exhaustive list, I consider the following to be the main positives of 529 plans:

No income tax bills. Any growth inside these plans is tax deferred, and if withdrawals are used for qualified education expenses, they are tax-free.

Minimal management needed. Most 529 plans come with a list of pre-packaged investment alternatives from which to choose. There are typically static allocation plans where the mix of investments is regularly rebalanced to keep a certain blend of asset classes. There are age-based plans that start off more aggressive when the child is younger and get more conservative as college admission time draws near. The parent only needs to select the approach, and the plan managers take care of the rest.

You stay in control. Unlike some other savings strategies for children, 529 plan accounts that are owned by parents never become the property of the child. For us, this has become a nice feature. Our kids have all finished college, and we have money left over in one of our 529 plans -- thanks, son, for joining the Army and letting it foot the bill. We now have the flexibility to change beneficiaries to help out our grandkids or even our kids with their advanced degree work. That ability to change beneficiaries or even withdraw the money at some point and use it for other purposes provides peace of mind as you choose to save for college during these uncertain times. Since a "non-qualified withdrawal" would likely result in taxes and penalties on any earnings that are withdrawn, it's typically not an advisable action -- but it's one you could take if you wanted to. Control granted!

The Cons

And in keeping with the spirit of non-exhaustive lists, here are a couple of potential drawbacks of 529 plans:

Education-focused. Unless you're interested in paying taxes and penalties to the IRS, you won't be using these dollars for anything except qualified education expenses. A few years ago, secondary education expenses were added to the list of "qualified," but if you have limited resources (don't we all?) and have to choose between your kids' college or your retirement, I'd choose to save for retirement. On that note, the Secure Act 2.0 includes a provision that could allow you to slide leftover 529 funds into your kids' Roth IRA -- see your tax adviser for the details.

Research still required. Plans vary in terms of investment offerings, fees and expenses, contribution limits and even state income tax benefits. Some plans have expense structures designed to be sold -- with commission or asset-based compensation -- by advisers. So if you decide to make the leap, do your homework and compare plans in these areas.

The Best Approach?

As I mentioned earlier, the best approach to college saving is to just do it. While the choice of college savings programs is something to be considered closely, there is no one best solution for all situations. For my family, the positives of 529 college savings plans outweighed the negatives. For yours, that may or may not be the case, but hopefully this information helps you to make an informed decision as you map out your plan to pay for college.

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