With college tuition on the rise, parents are looking for ways to save money for their child's education.
A 529 plan is one way parents and loved ones prepare for the expense of a child's college education. Illinois residents have two types of 529 plans to choose from: prepaid tuition and savings.
Tuition rates increase about 8% per year, approximately twice the general inflation rate, according to the financial aid resource site, FinAid.org. This statistic is what attracts most people to a 529 prepaid tuition program, which allows anyone to purchase future tuition at today's rate. The program is then responsible for paying the future college tuition of the beneficiary at any of the state's eligible colleges or universities, according to the College Savings Plans Network's website.
A 529 savings program permits people to save money in a college savings account on behalf of a beneficiary. Contributions and earnings on the account may then be used to pay the beneficiary's higher education expenses.
All money put into 529 plans grow federal and state income tax free. Most plans have very low minimum monthly contribution limits. The savings can be used to pay for tuition, fees, room, board, books, supplies and required equipment. The money can also be used at almost every accredited college in the U.S.
But despite the advantages of using 529 plans, some experts say these are not always the best option.
"The problem with the 529 plans is that they come with too many rules and restrictions," says Adam Bold, founder of The Mutual Fund Store, the largest independent, non-bank financial advisory firm in the country.
"There are very limited investment options," Bold adds.
Instead, Bold suggests creating a regular account in a mutual fund. It "gives the parents control," Bold says. "Despite what the stock market has done recently, I think long-term growth funds are going to be the best bet for most kids."
Flexibility, Bold says, is the major downfall of 529 plans. He says only one change per year is permitted on a 529 account.
"If you owned just mutual funds, you can move in and out as you see fit," says Bold.
Bold points out a scenario where investing in a 529 plan would be detrimental: "What if your child is a really great kid and ends up getting a full-ride scholarship? Now all a sudden you've got this money in an account that you're going to have to pay a penalty for you to get the money out."