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Q.What is a 529 Savings Plan Account?
Money contributed to a 529 Savings Plan grows tax deferred and withdrawals used to pay for qualified college related expenses (e.g. tuition, books, supplies, equipment, room and board) are tax free (at least at the federal level).
Assets in a 529 college savings plan remain in the parent's control. Your child cannot just take the money and buy a car or travel the world. If your child elects not to attend college, you can choose whether to withdraw the money for your own benefit or select a new qualified beneficiary (any relative).
If your child does choose to attend college, the 529 Savings Plan will NOT negatively affect their financial-aid potential because all 529 accounts are treated as parent-wned accounts.
The federal financial-aid formula assesses parent-owned accounts at 5.6% and student savings at a whopping 20%.
On the negative said, if you remove previously committed funds from a 529 savings plan for something other than higher-education expenses, you will have to pay income taxes on the earnings and a 10% penalty. Perhaps the biggest negative is the 529 Savings Plan's inflexibility. You can't directly manage the funds yourself. Most, if not all, states have selected a major mutual fund company or 401(k) provider to manage their 529 Savings Plans. The number of investment options varies, ranging from only a few mutual funds to about 30. Also, once you have chosen your asset allocation, you are locked in for a year.