College Planning Month Part 2: Pros and Cons of Using a 529 Account

There are a lot of myths around 529 plan that keep people from opening an account.  I’m not suggesting that everyone must use a 529 account to save for college (see next week’s blog for alternatives).  However, it is a slick tool and I hate to see people NOT using it because of misinformation.

So here’s the quick and dirty on why you would or would not use a 529 account for kids savings.


  • State income tax deduction (NOT federal) if you use your state-sponsored plan.  In other words, if you live in Colorado, you need to use a Colorado 529 plan to get the state income tax deduction.
  • Using a 529 plan does not dictate where your kid can go to college. They can go to any state’s school, public or private or vocational or even a list of 400 + international schools.
  • The beneficiary on a 529 account can be changed once per year for ANY reason to any relative out to first cousin level, including your-own-self.  Don’t like your kid’s new teenage attitude problem?  Bam, move the college fund to his sweet little sister.  Until she develops her own attitude problem.  And so on…
  • 529 assets do not belong to the child, so they count less toward the Expected Family Contribution in the financial aid calculation.
  • I should have led with this, but UNLIMITED TAX-FREE GROWTH on the investments.  It’s like the world’s biggest Roth IRA.
  • No time limit on when the money is used.  Is your kid a late bloomer?  Fine, leave the money in the account until she is 30.  Or 40.  Or has her own kids and use the money for the grandchildren.  That’s a LOT of years of tax-free compounding.
  • Money stays in the adult sponsor’s control.  More about this next week when we discuss custodial accounts.
  • You can take the money out at any time for any reason.  The first money you contribute comes out without any IRS penalty, although you will need to pay back the 4% state tax deduction (in CO) that you took.  Only earnings are subject to income tax and a 10% withdrawal penalty if the money is never used for college education.
  • Investments are in mutual funds, usually aged-based portfolios, making it easy to get started using professionally managed diversified accounts.
  • You can put a ton of money into these plans.  Like, $500,000 per beneficiary.  That means parents can contribute, but also grandparents, aunts, surprisingly rich cousins who you never thought would amount to anything, and friends who have no kids therefore more money than they know that to do with.
  • NEW AWESOME FEATURE!  Some unused 529 money can be rolled into a Roth IRA for your kids – see the last August blog for more on this.


  • In Colorado, you can’t use 529 money for private elementary, middle, or high school.  Other states allow 529 money to be used for pre-college education expenses.
  • If you don’t ever use the money for college for anyone, you will pay a 10% penalty and federal & state income taxes on the EARNINGS ONLY that you withdraw from the account.  Your principal can be taken out at any time without federal tax or IRS penalty.
  • You can’t transfer appreciated stocks or mutual funds into a 529 plan.  Only cash.
  • You can’t use the money for other benefits of the child like summer camp, rehab, buying a car, getting a pony, high school tutoring, etc. Just post-high school education.

Now we’ve done a little refresher on basic 529 plan rules.  Tune in next week where I will discuss two other options for saving for kids.



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