Why You Shouldn’t Have a 529 Plan

Yes this title may sound a bit loony at first, but read on.  I am not saying it is a bad idea to have money available for college.  What I am saying is that you should be saving on a regular basis for all contingencies.

Saving for college is full of problems, especially via 529 plans.  College is expensive but so is retirement.  Few people with two or more children can save for both college and retirement at the same time.  What is worse, you may lose potential financial aid by saving for college in the wrong way.  For example many people save through an UGMA (Uniform Gift to Minors Act) account in the child’s name – bad idea.  For one thing, the child can take the money and run when he/she turns 18.  Also, the calculation for financial aid will penalize you 20% (per year of college) for any money in a child’s name.  At the moment, it is unclear whether 529 plans will fall under the 20% penalty.  The rules are changing.  Any money you put in a child’s name or 529 cannot be used in emergencies.  In fact 529 dollars may be penalized for paying non college related expenses.  What if one child decides to start a business and not go to school?  The 529 money must be given to another child who is going to school.

Even if you save for college in your own name, the financial aid system may still penalize you if it is over a threshold amount – today that threshold is roughly $1000 times your age.  There are a variety of ways to avoid having dollars counted against financial aid that go beyond the scope of this article, but one example would be home equity.  You could pay down your principal and increase your equity with jeopardizing your financial aid eligibility and then use a home equity loan to pay for college.  Just one example.

If you would like more information on 529 or college savings alternatives, contact us by phone at 512.535.2674, or by filling out the form below:

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Copyright © 2010 David H. Disraeli, President The Personal CFO

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