If you’re a parent or planning to become one soon, you might be wondering how best to save up for your little one’s education. And let’s face it, with ever-increasing tuition fees, and it’s never too early to start planning!
You might have heard of two popular options are a 529 college savings plan and taxable investment accounts. But which one is right for you? We’re gonna break down the differences between the two and help you make a more informed decision, hopefully.
So if you’re ready to start saving for your kid’s college future, sit back, and let’s dive in together to figure out which of these options could be the best option for you.
What are the Similarities?
The 529 college savings plan and the taxable investment account have significant commonalities when investing in your child’s education. That is important to take this into account.
The following are the most striking commonalities that could influence your choice:
- Both allow you to invest money that can grow over time, earning more than you would with a traditional savings account.
- Each gives you the flexibility to choose how your money is invested.
- The 529 plan and the taxable investment account allow you to withdraw your money for any purpose, not just education expenses.
What are the Differences?
While there are some similarities between the 529 college savings plan and taxable investment accounts, some key differences are worth exploring. One of the biggest differences between the two is their tax treatment.
Contributions to a 529 plan are usually tax deductible at the state level. so they grow tax-free, meaning you won’t have to pay taxes on any earnings when you withdraw the money for qualified education expenses.
In contrast, the taxable investment account is subject to taxes on capital gains, dividends, and interest earned. Other differences include:
- Another difference is how the funds can be used. Five hundred twenty-nine plans are specifically designed for education expenses.
This means that you can only use the funds in your 529 plan for qualified education experiences like tuition, fees, room and board, and textbooks. On the other hand, taxable investment accounts can be used for any purpose.
- There is a different impact potentially on financial aid.
While 520 implants can’t positively impact financial aid eligibility, taxable investment accounts may be considered an asset and could reduce your child’s eligibility for need-based financial aid.
Pros and Cons: 529 vs. Taxable Investment Account
Ultimately, the decision between a 529 plan and a taxable investment account will depend on your financial situation goals.
It’s always a good idea to speak with a financial advisor and research to determine the best plan for your family. In order to help you, we wanted to make a quick pros and cons con list of each.
529 Investment Account
Pros:
- Tax deductible at the state level, and growth is tax-free
- Higher contribution limits than taxable investment accounts
- May help increase your child’s eligibility for need-based financial aid
Cons:
- Funds can only be used for qualified education expenses
- There may be penalties on educational expense withdrawal
- Offers a limited number of investment options
Taxable Investment Account
Pros:
- Funds can be used for any purpose
- No contribution limits
- Offers a wide range of investment options
Cons:
- Subject to taxes on capital gains, dividends, and interest earned
- Not tax-deductible
- This may reduce the chance of your child being eligible for need-based financial aid
Which One is Easier to Manage?
In general, 529 college savings plans are designed to be relatively easy to manage.
Once you set up your account and choose your investment options, the plan will automatically manage your investments for you, relocating your funds as needed based on your child’s age and investment goals.
This can make it easy to set and forget without having to worry about actively managing your investments.
However, it is worth noting that some tools and resources are available to help you manage your taxable investment accounts more easily. This could make those types of accounts less challenging.
Many online brokers offer robo-advisors, which use algorithms to automatically manage your portfolio based on your investment goals and risk tolerance. This can make it easier to manage investments without constantly monitoring them.
Which One is More Common?
When it comes to saving for education, 529 college savings plans are generally more common than taxable investment accounts.
This is because a 529 plan offers several benefits specifically tailored to education savings, such as tax advantages and higher contribution limits.
In fact, according to the college savings plans network, as of 2021, there are more than 14 million 529 plan accounts with a total of over $407 billion in assets.
These plans have become increasingly popular in recent years as more families look for ways to save for the rising cost of education.
Final Thoughts on 529 Vs. Taxable Investment Account
Both 529 college savings plans and taxable investment accounts have pros and cons, and the choice between them will depend on your financial situation goals.
In the end, it’s always a good idea to seek out the advice of financial advisors to determine the best plan for your family.
Regardless of which option you choose, saving for your child’s education is an important investment in their future, and it’s never too early to start planning. So we certainly hope that the information we imparted here helps you do just that.