529 college savings plans represent the financial tools that are most recommended to parents striving to save for a child’s college education. The principal appeal of 529 college savings plans is that investment returns aren’t taxed so long as the money is used for education.
Individual states establishment the investment options and often add on additional tax incentives. But according to Bloomberg, fewer than 3 percent of American families use these plans. Moreover, according to the General Accountability Office, those who do use them are disproportionately wealthy, with 25 times more in assets than those who don’t use such plans.
There are many reasons for the lack of utilization of such plans. First and foremost, many families simply don’t save money to put into these plans. Second, some of these plans charge large fees, which have the potential to wipe out any tax savings the plans provide. These fees vary from state to state. In Louisiana, for instance, there’s no fee at all on a basic plan for residents thanks to state subsidies. Another negative is that money in a 529 plan can’t easily be used to cover a financial emergency. Withdrawing money for non-educational reasons triggers taxes and a 10 percent penalty.
