When You Should (and Shouldn’t) Use a 529 Plan

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It’s a natural inclination for parents to start thinking about a child’s education as soon as their baby is born.

Considering the average cost of college in 2022 is more than $35,000 per student per year, a number that always seems to climb dramatically, it makes sense.

Investing in a 529 plan allows parents to earmark funds toward a college education while receiving a double tax benefit. But it isn’t the best option for everyone.

In this article, I’ll take a look at who should and shouldn’t use a 529 plan.

5 Reasons To Use a 529 Plan

If you fit any of these five intentions or descriptions, a 529 plan may be a great fit for you. Although there are a few downsides to 529 plans, there are many strong reasons to consider using them.

1. Take Advantage of the Double Benefit

Contributions to 529 plans grow tax-deferred. The distributions are also tax-free for qualified education expenses.

It’s not quite the triple benefit that HSAs can boast. But if you know the funds will go toward paying for college, a 529 plan offers plenty of tax benefits.

2. Fewer Contribution Limits

There are no income or age limits to contribute or withdraw from a 529 plan. Heck, you can use the funds to attend college yourself one day if you’d like.

There are also basically no contribution limits. The amount of money you’re allowed to contribute, in a lifetime, to a 529 plan range from $235,000 to $550,000. And that’s prior to investment gains.

Other than the requirement that you use the funds for qualified education expenses, 529 plans offer a lot of freedom.


3. Multiple Kids or a Large Extended Family Offers Opportunity To Hedge

There’s a provision within every 529 plan that allows you to change the beneficiary to certain other relatives. That includes your other kids if you have them. Extended family as well.

Don’t like the risks inherent to any 529 investment? Including the chance that your child never attends college? If you have multiple kids or extended family, you have the perfect opportunity to hedge.

Say you have two children. You could open up a 529 plan in the older child’s name, saving half the money you have to put toward both their educations in it. Then you can save the other half in a brokerage account or IRA. If the child with the 529 plan doesn’t need the money, change the beneficiary to the younger child — or another family member.

4. Gives You Control

Only a few states limit their 529 plans to in-state residents. You have the ability to pick from almost any plan in any state. If your state isn’t one of Clark’s favorites, simply pick another one.

Within each state’s fund, you have, typically, a healthy degree of choice about how you want to invest. You can typically change your allocation twice a year as well.

You also get control in another way. A 529 plan beneficiary has no legal rights to the funds.

5. Option To Lock In Today’s Tuition Rates

Certain states still offer prepaid tuition plans. It locks in your child’s college choice to a public university in that state. But you can get future tuition at today’s prices, which could create enormous savings.

If you’re trying to stretch your dollars to be able to afford a college education for your child, this could be a path worth investigating.

5 Reasons To Avoid a 529 Plan

You’ve gotten a sense of the strengths of investing in a 529 plan. But there are also reasons that you may want to avoid them.

A Roth IRA can be an excellent alternative to a 529 plan. Roth IRAs have their own pros and cons as vehicles for college savings.


You can also invest through a brokerage account, use a savings account (or CDs) and more.

Whether you use those other alternatives in conjunction with a 529 plan or instead of one, 529 plans aren’t the only option.

Here are some of the things to consider doing before committing funds to a 529 plan.

1. Prioritize Your Own Retirement First

Clark firmly believes that you should make sure you’re on strong financial footing before investing for your children. That includes an emergency fund, paying off high-interest debt and staying on track with your retirement.

“There was a study that found that parents give their adult children $2 for every dollar they put aside for their own retirement. I mean, that’s not gonna work,” Clark says. “When a parent gets to retirement age and they don’t have enough money to live on, the kids have complete amnesia of what their mom and dad did for them.”

2. You Must Use the Funds for Education

What if your child never attends college? What if they get a full scholarship? What if they attend a local community college and you’ve over-saved?

The double tax benefits of 529 plans disappear in favor of negative consequences if you don’t end up needing some or all of the money to pay for your child’s college education.

You can withdraw the money and pay a 10% penalty in addition to income tax. You can also designate a new beneficiary that’s related to you so they can use the funds for their own college education.

But you’re taking a calculated risk by putting your funds into a 529 plan. This money is earmarked specifically for qualifying education expenses.

3. College Is Evolving Along with Traditional Career Paths

There are statistics that indicate college enrollment is declining.


For many, a college degree is no longer necessary to earn a good income. A 9-year-old boy has earned tens of millions of dollars from YouTube.

Studies show that kids are dreaming of becoming YouTube stars these days instead of firefighters, astronauts and doctors.

As the digital economy becomes more accessible to anyone, and the options balloon, the number of career paths that don’t involve college could be quite striking in 10 or 20 years.

4. 529 Plan Funds Can Impact Financial Aid

A 529 plan in your child’s name, even from a grandparent, can hurt their chances of financial aid. That includes subsidized federal loans, grants and work-study programs.

5. Fees Can Be Expensive

If you’re willing to research the best 529 plans by state, you can get around this even if your state’s plan is particularly expensive.

But as Socrates said, “To know thyself is the beginning of wisdom.” If you’re certain you won’t take the time to get into an inexpensive 529 plan, and your state’s plan is loaded with fees, you may want to rethink it.

Final Thoughts

Contributing to a 529 plan to fund a child’s college is a great idea for many people. But one shouldn’t start jamming money into a 529 plan from the day a child is born without taking into consideration the risks and potential downsides.

A 529 plan also doesn’t need to be all-or-nothing. It’s possible to put a percentage of your college fund money into a 529 and keep a percentage outside it.

The bottom line is just making sure you do your research and know what you’re getting into before locking your money into a 529 plan.

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