What are the pros and cons of using a 529 plans for my kids' college?
On the plus side:
- 529 plans offer tax-free distributions when the money is used for qualified education expenses.
- They allow the account holder rather than the beneficiary to control the account (so you aren't giving the kids free rein should they decide to use the money to buy a sports car!).
- The contribution limits are very generous.
- If the beneficiary does not go to college, the account can be transferred to an eligible relative.
- If you decide you need the money after all, you can close the account (taxes and a 10% penalty will apply).
On the negative side:
- The investment options available through the 529 plan may be limited.
- There are the usual investment risks.
- As with any investment, there are fees involved.
Check out the California 529 plan, Scholarshare, but be aware that you can invest in any state's 529 plan. You can also explore Coverdell savings accounts, which offer almost unlimited investment options. However, the annual contribution limit is just $2,000.
Another option would be to pay their tuition directly to the college or university out of your personal accounts. In that case, you are not limited to the annual gift tax exclusion (currently $13,000, or $26,000 if your spouse joins you in the gift). You'll also lower the value of your estate, potentially saving on estate taxes. (Note that federal estate taxes are repealed in 2010 and will be reinstated in 2011, pending legislation.)
Back to FAQs