3 529 Savings Plan Mistakes to Avoid

With the cost of college on a rise, a growing number of parents are researching the pros and cons of a 529 savings plan. This allows you to save money for your child’s college, all in an account that is not subject to federal income tax.

Just the same as any type of financial decision, there are things you should and should not be doing. Unfortunately, there are several 529 savings plan mistakes that have held people back in the past and will continue to do so in the future. Here are three that you want to avoid at all costs:

1. Overlooking or not understanding the fees. Did you know that most 529 savings plans charge a percentage of your total investment as a means of covering the operating cost?

Note: 529 savings plans offered through investment firms typically cost more than those sold directly by a state.

2. Withdrawing money to spend on unqualified expenses. You must know which expenses can be paid with distributions from a 529 savings plan.

Just because you are spending money on the cost of college does not mean it is necessarily a qualified expense. For example, you cannot use money from the savings plan to pay for transportation costs or to repay student loans.

When you withdrawal money early to pay for something other than qualified expenses, it will result in a 10 percent penalty as well as taxes paid on earnings.

3. Not watching your investment closely. Just the same as a retirement account, as you get closer to using the money you may want to adjust your approach to minimize the risk. The less time you have the more conservative you should be. If you aren’t, you could make a big mistake that costs you and your child a lot of money.

Tip: rebalance your investments at least once per year.

With so many benefits of a 529 savings plan, it would be a shame to let one or more of these mistakes hold you back.