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When it comes to saving for college, you want to make sure that you are on the right track. One way you can help your children save for college is to open a 529. I am glad of my son’s 529 plan, but I also know that in some cases, a 529 can trip you up. Just like any other investment product, there are pitfalls to try and avoid. And, of course, a 529 isn’t for everyone. Before you decide to invest in any college savings plan, make sure that you take some time to research what’s available, and that you understand some of the downsides that some investments carry.
Here are 3 things you should know about 529 college savings plans before you invest:
- Not all 529 plans are the same: 529 plans are offered according to states. Different states offer different plans. Some states offer more than one plan. It is vital that you understand that some states have plans that restrict you to using the earnings from your plan to schools in that specific state. Other plans will let you use the money in other states. I chose to go with an Ohio 529 that will allow my son to use the money no matter where he goes.
- You have to pay fees on 529 investments: Most 529 plans offer fund options for you to invest in. As a result, your investment returns are going to be eroded by the fact that funds charge fees. You will have to pay load fees, administrative fees and other fees. Before you invest, take a look at the options available in the plan. The 529 plan that I invest in offers a low-cost index fund, and that’s what I went with. In order to maximize your returns, it is a good idea to make sure you understand the fees that come with your 529 plan.
- 529 plans can be inflexible: Another issue with 529s is that they can be quite inflexible in some cases. You can only change your investment once a year. Another issue is that you might be limited in other ways as to how you can spend the money in the account. In some cases, it might be worth it to consider a college savings account with a relatively high yield, or a CD ladder. You might also consider buying tax-advantaged bonds (municipal bonds, for example) to give you a little diversity in your college savings investments.
It is important to note that you will not receive a federal tax deduction for the money that you invest in a 529. While the money does grow tax free (as long as the earnings are used for education expenses), contributions you make do not come with a federal tax benefit. Some states do offer their own tax breaks, though. Look into what is available from your state. Some states will give you a tax break on only plans from that state, while others offer benefits on contributions you make to out-of-state plans as well.
In the end, it is important that you carefully consider your situation, and do your homework. Make sure you are getting a 529 that works with your needs, and that offers as much flexibility as possible.