529 Plans are financial instruments for College that are neither good nor bad, but have benefits and drawbacks to consider. There might be other financial vehicles available that could have as good if not much better benefits.
Here are some things to consider before placing your money into a 529 Plan. 
- The 529 [like a 401k, 403b etc] is an IRS approved instrument that you could put money into with the main benefit being that the growth inside a 529 Plan is not taxable if you use the money for approved college expenses.
- Once you put the money into a 529 plan however, you are subject to all the rules and penalties of the plan as to when and who can use it or not. Since you are locked into these rules, you do not have flexibility if your circumstances change regarding education needs, nor do you have easy liquidity, use and control of your money. Note that if you need to access the money for anything other than college, you will pay a 10% penalty plus tax on the growth.
- The 529 Plan is not necessarily a “Savings” Plan and in many cases are subject to market fluctuation. Depending on how you structure your 529 plan, it may be exposed to the market’s volatility and you could lose money. In other words, it becomes an investment vehicle and not a savings vehicle – often with limited investment options. Since no one can predict what the market will be doing at the time you require the money, so be ready for the possibility that the money might not be there when you actually need it for college. For those plans that are not subject to the market’s fluctuation, they have very low returns in today’s economic environment.
- Often 529 plans are not managed closely for the right timing for the student’s needs. I have met with many clients who have students with 1 or 2 years to go for college that are invested in high risk portfolios because nobody has been actively planning their allocations with the possibility of losing the money just when they would need it.
- The money that you put into a 529 plan could reduce your ability to get financial aid when you complete the FAFSA form, by increasing your Expected Family Contribution (EFC), sometimes increasing your out of pocket by $30,000 – $60,000 over 4 years.
- The main drawback with a 529 plan is that when you draw the money out, you cannot put the money back into a tax-advantaged growth environment. This means you have interrupted and stopped the miracle of compound interest on your money in many cases just when compounding starts to snowball. Many families have the ability to save more money once the kids are out of college, but with the 529 Plan, once the money is taken from the account, the account is closed losing all the initial perceived benefits. There might be other vehicles that could be better suited for many families.
It could be extremely valuable to talk with an advisor who is has knowledge of the whole College Planning process before putting any money into any particular College Savings Plan.
Whether it be for College Planning or Retirement Financial Planning, let’s PLAN
Dave Coen is CEO of College Planning America and a Registered Representative at Sageview Advisory
Tel: 714-813-1703 davec@collegeplanningamerica.com
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