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In the United States, a 529 account is an investment vehicle that provides tax advantages for future higher education expenses. This account is ideal for parents who are planning to send their children to college. However, there are some cons of opening one. Read on to learn about the alternative investment vehicles, fees, and financial aid implications of a 529 account.
Alternatives to opening a 529 account

Despite the benefits of 529 plans, they aren’t the only option for college savings. There are other options, too, including a savings account at your local bank. These types of accounts are liquid and offer quick access to your money. In addition, there are no penalty or transaction restrictions, and you can transfer money six times per month.

One downside of 529 plans is that the investor doesn’t have much control over the investment options. These funds are managed by the state that offers the plan. Some also charge high fees. Additionally, 529 funds count against a student’s EFC and assets for financial aid purposes. This could prevent them from receiving need-based aid or work-study programs. If you’re concerned that these plans won’t work for your family, consider other options.

Another downside to 529 plans is the amount of money you can contribute. While the IRS doesn’t set annual contribution limits, there are federal gift tax limits. The amount that you can contribute to a 529 plan must equal the expected cost of the child’s college expenses. The federal gift tax limit for 2022 is $16,000 per individual and $32,000 for married couples. The exception to this rule is the initial contribution. If you want to give more money to an existing account, you can do so by enrolling in a free college gifting program. These websites let family members and friends contribute electronically to the college account and make it easy to track.
Fees associated with a 529 account

The fees associated with a 529 account can vary. Some states have no account set-up fee, while others charge up to $964 for the lowest-cost option. Some plans also charge a one-time enrollment fee or an annual account maintenance fee. The annual account maintenance fee can range from $10 to $25, depending on the plan. Some plans offer a fee waiver when you meet certain conditions.

Some 529 plans are advisor-sold, which means they are sold by registered investment advisors (RIAs). These professionals have a fiduciary duty to their clients, and may choose to place your child in a no-load share class (Class I shares). Although advisors charge a sales fee, many do not. You can also find advisors who will give free advice without charging any fees. Some RIAs are even offering pro-bono college planning advice to clients.

Some 529 plans have high fees, which decrease the returns of your investments. You can check the fees and expenses associated with a 529 plan by reading its offering circular or by visiting the college savings plan network website. You can also use a tool developed by the Financial Industry Regulatory Authority (FINRA) to compare 529 expenses.
Financial aid implications of a 529 account

Investing in a 529 account can have a positive impact on your child’s financial aid eligibility. These savings plans are considered an asset of the parent and reduce the amount of federal student aid the child will need to pay for school. The financial aid implications of a 529 account depend on which institution the student is attending and how much money they have saved.

Federal financial aid is calculated based on a student’s FAFSA, and it considers the parents’ assets. A 529 account under a parent’s name is considered a parental asset, but it only counts as 5.6% of the parent’s assets. In contrast, a child’s own assets are only considered at 20 percent. This means that if your child is a dependent, you’ll need to make sure your child’s 529 account is owned by him or her.

There are a few pitfalls to a 529 account. Federal aid will be significantly reduced if your child is the sole owner of the account, but there are alternatives to limiting the amount of federal aid that the student is eligible to receive. Although the financial aid implications of a 529 account are minimal, they are important to consider before establishing a 529 account.

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