Kovar Capital: Is a 529 Plan the best way to save for college?


Hey Taylor - I’ve been looking at the different ways I can put money aside for my kid’s education, and it seems like the 529 plan is the best bet. Am I missing anything? - Wendy

Hey Wendy - It’s true that a 529 offers the most incentives when it comes to saving for college. The only drawback is that you can’t put the money toward anything else, so you’re taking a pretty big leap of faith if you start funding the account when your child is still in elementary school. It might be the right choice, but it’s still worth weighing all the pros and cons.

Pros. A tax-free account is usually not a bad thing. A tax-free account with high contribution limits is almost unheard of. Dollar for dollar, you won’t find a better way to save up a lot of money without having the IRS skim some off the top. A 529 also requires little work on your end, so you don’t have to do much other than put in cash and let the money grow. If you start early enough, you can save yourself a lot of stress when it comes time to pay those super high tuition fees.

Cons. The big problem is a lack of flexibility when it comes to how the money gets used. If your son or daughter doesn’t go to college, any withdrawal unrelated to education is subject to taxation and a 10% penalty on all earnings. If you’ve been putting $20,000 aside each year and suddenly have to cover 10 years of taxes, the loss might just make you faint. You also have to be cautious when choosing your plan, as some come with higher fees than others. If the investment options are limited and the fees are excessive, the tax-free part doesn’t matter quite as much.

Alternatives. It takes a bit of a mindset shift, but a 529 plan isn’t the only way to save for college. Some people put money into a Roth IRA, as qualified education expenses don’t incur the early withdrawal penalty. You can also start a custodial account, which has tax advantages without requiring that the funds go toward education. If you feel comfortable with the stock market, you can put the funds into a brokerage account and let the money grow and earn dividends. None of these options have the combination of high contribution limits and tax-free growth, but the flexibility of putting the money toward starting a business or keeping the funds for retirement has a lot of appeal.

In the right situation, a 529 plan is probably the best option. You just have to give some serious thought to whether or not that’s your situation. Thanks for asking and good luck!

Disclosure: Information presented is for educational purposes only and is not an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. To submit a question to be answered in this column, please send it via email to Question@GoFarWithKovar.com, or via USPS to Taylor Kovar, 415 S 1st St, Suite 300, Lufkin, TX 75901.


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