Saving for College? Don't Assume a 529 Is Best
Most middle-class families are better off without 529 college savings plans, which produce minimal tax savings and may have high fees and conflicts of interest.
Maybe a 529 isn’t the best way to get here.
Photographer: Timothy A. Clary/AFP/Getty Images
So many Americans are pushed into 529 plans and told it's the only way to save for college. 529s are touted as tax-advantaged because the contributions to the plans are invested and grow in the accounts tax-free. If withdrawals are used for approved education costs, there aren't any taxes on the gains, as there would be with a mutual fund or brokerage account. But studies show only a small percentage of those using 529s actually benefit tax-wise. Worse, many are steered into high-fee plans that eat away at returns. Most middle-class families would actually be better off without them.
Like me. I should have taken the $1,000 my father gave his baby grandson in 1990 to pay down debt or invest in a long-term, low-fee stock fund instead of a 529. The fees associated with his 529 plan reduced its value by about 20% over 17 years. Because we were in a fairly low middle-class tax bracket, we wouldn't have owed taxes on gains in a mutual fund. (Only if you're over a certain income and in a higher tax bracket are you subject to long-term capital gain taxes). Also, it turned out we didn’t need to save so much — he won merit fellowships and tuition offsets.