As with most great things, there are always positive and negative things that come with any great idea. This idea holds true when you are talking about section 529 plans. Being able to step back and take a look at the big picture is a good way to avoid any problems later on. After all, it's always a good idea to know what you are getting yourself into. It's bad to get stuck with something that you did little research on, because you may not be getting everything you think you are getting. That is why I have come up with a few advantages and disadvantages of 529 plans. By looking at a few of these, you may be able to tell if this kind of plan is going to be something that you want to give a try. Although the good stuff outweighs the bad, you still need to get the whole story to make a good choice.
First of all, we will start out with some of the good things. By using this kind of play, you are going to get some great income tax breaks. Although it's not deductible on your federal tax return, your investment (as it grows) is pretty much tax free. This is because the investment grows as tax deferred. This tax free treatment was made possible by the Pension Protection Act of 2006. Also, it's worth pointing out that you may also get some other tax breaks from your state. Some tax breaks that usually come from your state are things like upfront deduction for your contributions and income exemption on withdrawals. It is great to get a big tax break like this on your schooling, and by mixing the state and federal treatment together, you can see how this can save you a lot of money. In fact, for a lot of people the 529 plan makes it possible for them to go to school or send kids to school.
As said before you can only have the good with the bad. It has been pointed out a number of times that there are some very high fees that go with the 529 plans. In fact, these high fees may actually make these plans less effective than most people would like to think. Whenever we think of the 529 plan, we like to think of it as part of our savings tools.
However, with the high fees that come with it, there are some more traditional funds that may work out better in the end. There are some plans that are working to improve this big flaw by reducing the fees and offering most investment options. Of course, the fact remains that many 529 plans still charge the big exorbitant fees that, pretty much, negate the positive aspect of the tax free benefits. Just to show you how much some of these fees differ, one company charges a very good $20 fee for the 10 year investment. While another company may charge over 35% of your original investment over the course of 10 years.
As you can see, there are ups and downs with both sides of the story. All you need to do is look into it, and choose which one you feel is right for you.
Dean Novosat writes for http://www.529informer.com, a site dedicated to helping students afford college with info on Section 529 plans.
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