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Good and bad of 529 plans

By Kemberley Washington ·
Monday, June 17, 2013
Posted: 10 am ET

Despite rising costs, a college degree still is viewed as a great investment. A person who holds a bachelor's degree will earn on average 38 percent more than someone without a degree, according to the U.S. Department of Education's National Center for Education Statistics.

A Section 529 college savings plan can help make college more affordable. Named after the section of the Internal Revenue Code that created these plans, Section 529 plans offer a tax-deferred option to save toward education costs.

There are two types of 529 plans: prepaid and savings. A prepaid plan allows you to pay college tuition at today's prices for someone -- you, a spouse or a dependent -- to attend school sometime in the future.

A savings plan works similar to a 401(k) account. You contribute a certain amount of money to pay for college expenses in the future.

Here are the good and the bad of these plans.

The good

A 529 plan allows earnings to grow tax-free for qualified education expenses. By contributing, you also may be eligible for a state tax deduction.

Although the plan requires you to name a beneficiary, you are able to change the name of the beneficiary. So if Junior decides to follow his dreams and become a professional basketball player, all is not lost! Instead, you can request to change the beneficiary to another child who has decided to go to college. And if Junior makes it to the NBA, maybe he'll help you pay the bills.

The bad

Investment choices in a 529 plan may be limited. And if you choose to invest in stocks or other potentially risky assets, you could potentially lose some or all of your money.

Also, if the money in a 529 plan is not used for qualified expenses, it is subject to income taxation. Such withdrawals are subject to an additional 10 percent penalty.

Kemberley Washington is a certified public accountant and business professor. She writes a personal finance blog at Follow her on Twitter and on Facebook.

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