529 plans are popular for parents to save for their children’s educations. However, just because 529 plans are called education savings plans, it does not mean they are the only way you can save for future education expenses. It does benefit you because it is tax-free as long as it is used for qualified educational expenses yet it is not the only way to save for education expenses. Therefore, today we are breaking down the pros and cons of various ways to save smartly for your child’s future.
When you select a 529 plan to save for college you will get a huge incentive. The benefits are so popular among Americans that the president had to quickly change his plans for getting rid of the tax benefits since there were so many complaints. However, as with everything else, even though it is popular it does not mean it is the best plan for you. Therefore, before you get started, consider the following things.
Compare the Fees against the Taxes
Taxes do become expensive; however, if you are going to be paying more in fees than what you are saving with the tax benefits, it doesn’t make sense. Even the lowest cost index fund portfolios are expensive. Therefore, you have to do some number crunching to make sure a 529 plan is the best option for saving for your situation.
Non-Qualified Expenses Have to Be Factored In
Life is full of surprises. Even though you hope, your kids will decide to take the college route after high school that may not be the route they decide to take. Additionally, a family emergency could come up and you may need the money that’s in your 529 before college time. In either of those scenarios, you would be forced to pay a 10% penalty and you would have to pay regular income tax rates on the gains.
There Are Other Alternatives Aside from Taxable Accounts
IRA’s are another option because you avoid penalties for qualified higher education expenses. There are also Savings Bonds and EE/E Savings Bonds. You can get them through the Treasury and you get tax deferrals and tax free earnings as long as the money is used for education.
Now that we have covered the pros and the cons of 529 plans, you can decide if a 529 plan is the right way for you to save for the future. We want to stress that while they do have their rewards; it is not always the best option for everyone. Make sure you know what you are getting yourself into so you know what can be expected from your investment.
Turning to TurboTax for Help at Tax Time
When you turn to TurboTax for help it will be like an interview. They will ask easy to answer questions while filling in the correct tax forms for you behind the scenes.