529s: Yay or Nay?

Posted by: Lauren Young on March 15, 2007

A reader writes: “You wrote a short piece on 529s about a year ago, which I just read on the web. I’ve been trying to sort out whether to invest in them for my kids, and I must say, the picture is quite mixed. I have read a lot about their virtues, but not seen much about their pitfalls and I want to point those out to you, perhaps for a future column. I feel there is a big industry push to promote them, but parents need to know the limitations, too.

“First, in NY, where I also live, they are state but not federal tax deductible. Your article doesn’t make that distinction. Second, once you invest in them and pick an investment strategy, you can only change that strategy once a year – ie change the investment allocations once a year. That may not matter for a little kid, but for older kids, the limited flexibility means it’s hard to respond quickly to changes in a volatile market.

“Also, I have consulted several financial planners who don’t think they are that great, unless you have a lot of spare cash or it’s money from grandparents, etc., gift money, and who suggest focusing savings on yr retirement accounts. You get a full federal tax deduction by putting money into a retirement account, the account doesn’t count at all towards financial aid for colleges, and my understanding is that if you take money out of your retirement accounts before you reach 59.5 years for your kid’s tuition expenses, there isn’t a penalty (I read that in the WSJ this week but I would double check). Yes, you do pay taxes, but you would pay federal taxes, which are the bulk of the taxes on a 529 in NYS anyway.”

So what do you think about 529s? Are they worth it, despite the limitations? Or are you taking other steps to fund college?

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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