What are the pros and cons for saving for college in a 529 plan, a taxable brokerage account owned b

April 10, 2023

Each of these accounts has potential benefits and drawbacks when saving for college. Here's a summary of the pros and cons:

529 Plan:

Pros:

  1. Tax Advantages: Contributions grow tax-free and withdrawals for qualified education expenses are also tax-free.
  2. High Contribution Limits: Most states have very high total contribution limits, often more than $200,000 per beneficiary.
  3. Control: The account owner maintains control of the account, deciding when withdrawals are made and for what purpose.

Cons:

  1. Limited Use: If funds are withdrawn for non-qualified expenses, the earnings portion of the withdrawal is subject to income tax and a 10% penalty.
  2. Limited Investment Options: Each 529 plan has a set menu of investment options, which may not suit everyone.

Taxable Brokerage Account (Parent-owned):

Pros:

  1. Flexibility: There are no restrictions on how the funds can be used.
  2. Unlimited Investment Options: You can invest in any stock, bond, mutual fund, or ETF.

Cons:

  1. Taxes: Contributions are made with after-tax dollars. Capital gains and dividends may be subject to taxes.
  2. Financial Aid: A parent-owned account is considered a parental asset on the Free Application for Federal Student Aid (FAFSA), which can affect financial aid eligibility.

UTMA Account (Child-owned):

Pros:

  1. Flexibility: There are no restrictions on how the funds can be used.
  2. Unlimited Investment Options: You can invest in any stock, bond, mutual fund, or ETF.

Cons:

  1. Control: Once the child reaches the age of majority (18 or 21, depending on the state), they gain full control of the account and can use the funds as they wish.
  2. Taxes: While there is a small amount of income that can be earned tax-free or taxed at the child's rate, any income above that amount is taxed at the parents' rate.
  3. Financial Aid: UTMA accounts are considered a student asset on the FAFSA and can significantly impact financial aid eligibility.

Choosing the right account type depends on your specific situation, including your financial circumstances, your child's age, your college savings goals, and potential financial aid considerations.