The Cons of 529 Plans: rules, rules, and more rules!
All my clients that are parents or grandparents want the best education for their kids and grandkids. They understand the number one investment they can make for their child’s financial future is a great education that can create higher earned income. Typical financial advisors and the government constantly promote and encourage parents and grandparents to invest in a 529 plan for higher education. So this must be the best plan. Or is it?
Hear me out.
Typically financial advisors preach for parents to set up a 529 plan to save for their child’s education because it reduces taxes all while creating a future for their children. I invite you to go to the super fun and exciting government website to read all the rules for a 529 plan, I’ll wait.
Don’t get me wrong, a 529 plan is great in theory, but in reality it’s a great seduction plan created by the government and the financial industry. There are a few reasons to like it, but there are even more reasons to not like it.
Government savings incentives like the 529 plan are a marriage in hell between the financial industry and the government. The main reason you are enticed to use a 529 plan versus a regular investment is to save on taxes. Taxes become the main focus. Unfortunately, the tax tail is wagging the investment dog. Typical financial advisors encourage you to put your hard earned money in a 529 plan so they can enjoy it now and for the next 18 years (depending on when you started funding the 529 plan). While you own it, the IRS controls it via rules, rules, and more rules. If you break the rules you get to enjoy the tax penalties. Are these rules to protect your child’s or grandchild’s education? Are these rules to protect you? Or do these rules benefit Wall Street, the government, and its affiliates?
A 529 could be perfect for you if:
- You know for certain your family won’t need to access this money for 18 years or so.
- You are perfectly happy having money locked up on your end while the financial industry enjoys your money today via the commissions, money management fees, and 12b-1 charges.
- You have no doubt in your mind that your child will be attending a college approved by the IRS.
- You are not worried about the stock market volatility. You feel very, very comfortable it will never crash again. Or it will completely recover just in time for college tuition.
- You understand that this 529 plan could have a huge negative impact on available financial aid for your child or grandchild.
Typically, setting up a 529 plan assumes that your child or grandchild will want to attend a university, earn a degree, and get a job. But what if they don’t want to go to the university you had in mind? What if you need that money in the interim due to an emergency (lost job, health scare, big move)? What if your child or grandchild wants to pursue a higher education outside of college? If you need the money for an emergency or it’s used for something other than what the IRS deems as “higher education,” you broke their rules and there could be painful tax penalties from the government.
Let me hop on the soap box real quick: there’s a myth perpetuated by universities that the only way to get a higher education is to go to college. As a college graduate, I am not saying I regret my formal education. I’m very grateful to have earned my B.S. degrees in electrical and civil engineering. However, I also earned an incredible education in engineering by working with people that had a higher education from the military, major telecom companies in the U.S., fabricators, machinists, and construction workers.
OK, hopping off now.
If you’re still with me, I want you to know there’s a different way to play the game!
My Game: The Alternative To a 529 Plan
How would you like to design a savings & investment plan with very few rules?
- Less rules = more options.
- Income tax-free growth.
- Guaranteed growth.
- Potential for greater than 4% net internal rate of return (IRR).
- Money can be used for all forms of higher education for your child or grandchild.
- Doesn’t impact available financial aid.
- Can be accessed anytime while in growth phase (e.g. emergency, other investment opportunity).
- Can be used for more than just education: wedding, travel, loans, ….
- No negative impact on financial aid.
If you’re interested in learning more on how to design your own ”way better than a 529 plan” for your child’s or grandchild’s education, let’s schedule a time to talk.