I was recently asked by a client with a young family if they should open a 529 college savings plan for their young daughter.
The answer was, “Probably, but not exclusively.”
Here is what I meant by that:
A 529 plan is hands down a fantastic college savings tool. If you have a longer time horizon, the tax advantages are significant.
At the same time, there are conditions on using the funds in a 529 plan penalty and tax-free. So, if you want the flexibility of using the money earmarked for your kids’ education for something outside of an approved expense, I recommend having some money invested for your child outside of a 529 plan.
Most of my clients saving for college have both a 529 plan and money invested outside of a 529 plan. That being said, if you have money in a 529 plan and end up using it for a non-qualified expense, the costs of doing that – paying income tax and a 10% penalty on the earnings – are not so onerous as to be crippling financial decision.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/ SIPC.
Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.