…THAT is the question.

Like us, you may be debating the best way to save for your child’s education.

You have also probably heard of the most notable account for education saving and investing: The 529.

Named after Section 529 of the Internal Revenue Code, the 529 college savings plan is a tool many parents and grandparents turn to when thinking about funding future educational expenses.

But like every financial instrument, it has its strengths and weaknesses.

Let’s dig into this more.

Pros of the 529 Plan:

1. Tax Advantages: The 529 is unique in its tax benefits. Contributions grow tax-free and, when used for qualified educational expenses, withdrawals are tax-free too.
2. State Incentives: Depending on where you reside, your state might offer additional benefits. Many states provide tax deductions or credits for 529 contributions. These incentives can be a cherry on top of your savings strategy, but their value varies by state.
   1. Find out how your state compares: How Much Is Your State’s 529 Plan Tax Deduction Really Worth? – Savingforcollege.com
3. Flexibility: Contrary to popular belief, 529 funds aren’t limited to just tuition. They can be used for a range of educational expenses, from books to room and board. Moreover, if one child decides not to pursue higher education, the beneficiary can be easily switched to another family member.
4. K-12 Private Education: Post-2017 tax reform, families can use up to $10,000 per student per year from their 529 plans for tuition expenses at an elementary or secondary public, private, or religious school. This widens the scope of the 529 beyond just higher education.

Cons of the 529 Plan:

1. Limited Use: If you end up not using the funds for qualified expenses, be prepared to pay taxes and a 10% penalty on earnings (though not on your original contributions).
2. Impact on Financial Aid: Money in a 529 plan can impact a student’s eligibility for financial aid. It’s not as detrimental as assets directly in a child’s name, but it’s a factor to be aware of when planning.
3. Lack of Investment Options: Unlike other investment accounts, state 529 plans often have limited investment options.

The Changing Landscape of Education

It’s also important to recognize the shifts in our educational environment.

In the 1970s, roughly 70% of jobs that offered a path to earning middle class income did not require a college degree. Now, nearly all those same jobs require one.

As a college degree became more and more of a necessity, the cost of college rose 497% (more than 2x the rate of inflation) between 1985-86 and 2017-18.

It begs the question of how long this can continue and whether the juice is still worth the squeeze.

Today, with the rise of AI, online courses, and DIY learning platforms, the traditional norms of education are being challenged. We’ve officially entered an era where a college degree might not hold the same weight or necessity it once did.

What if your 529 is overfunded?

1. Hold for Future Use: Just because a beneficiary doesn’t need the funds immediately after high school doesn’t mean they won’t in the future. Graduate programs, specialized training, or even a decision to return to school later in life could mean the funds come in handy down the road.
2. Change the Beneficiary: As mentioned previously, one of the most flexible features of a 529 plan is the ability to change the beneficiary without incurring any tax penalty, as long as the new beneficiary is a family member. This could be a sibling, cousin, grandchild, or even yourself if you’re considering furthering your own education.
3. Non-Educational Withdrawals: If you’re sure the funds won’t be used for education, you can make non-qualified withdrawals. Be prepared to pay income tax and a 10% penalty on the earnings portion of the withdrawal, though. Your contributions, since they were made with after-tax money, are not subject to these penalties.
4. Fund Beneficiary’s Roth IRA: Starting in 2024, unused funds from a 529 plan can be rolled over into a Roth IRA for the account’s beneficiary without penalty. This new tax-free rollover rule — part of SECURE 2.0 — means you don’t have to worry about the current 10% penalty on the earnings if a) you’ve got money left over and b) are comfortable putting it towards the beneficiary’s financial future. The rollover is limited to $35,000 and is subject to annual Roth IRA contribution limits.

529 Alternatives:

1. Coverdell Education Savings Accounts (ESA):
   • Pros: Funds can be used for elementary, secondary, and post-secondary educational expenses. They offer tax-free distributions for qualified educational expenses.
   • Cons: Contribution limits are relatively low ($2,000 per beneficiary per year), and there are income restrictions for contributors.
2. UGMA/UTMA (Uniform Gift/Transfer to Minors Act) Custodial Accounts:
   • Pros: No limit on contributions and can be used for any expense benefiting the child, not just education.
   • Cons: Funds in these accounts are considered the child’s assets, which can impact financial aid eligibility. Additionally, once the child reaches the age of majority (often 18 or 21, depending on the state), they gain full control over the assets.
3. Savings Bonds (e.g., Series EE and Series I):
   • Pros: Interest from these bonds may be tax-free if used for qualified educational expenses, and they offer a safe, government-backed investment.
   • Cons: They often provide lower returns compared to other investment vehicles.
4. Prepaid Tuition Plans:
   • Pros: Allows parents to pay today’s tuition rates for future education, effectively “locking in” the current rates.
   • Cons: Typically limited to state public universities, and if the child attends an out-of-state or private college, the plan may not cover all costs.

The Bottom Line

To 529 or not to 529, that is indeed the question.

The landscape of education and financial planning is complex and ever-changing. While 529 plans offer unique benefits, they may not be the perfect fit for every family.

As you consider the future of your child’s education, take into account the myriad of options available and weigh their pros and cons carefully.

There are no one-size-fits-all solutions.

Whether you opt for a 529, explore alternative savings methods, or combine multiple approaches, the key is to be informed, proactive, and always keep the best interests of your child at heart.