What Are the Disadvantages of 529 Savings Plans?

Pros and Cons of 529 Savings Plans

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For many parents and guardians, a 529 savings plan is a great way to save money for a child's college education. There are few downsides to a 529 account, but they do exist. The disadvantages of 529 savings plans include limited investment options, potential fees, a penalty if you don't use the withdrawals for eligible items, and more. Review all of them below and then decide if a 529 savings plan is right for you and your future college student.

Key Takeaways

  • With so many advantages, it can be difficult to think that there are any disadvantages to 529 savings plans.
  • If you're saving money for a child's college education, consider the potential fees, limited investments, and more before opening a 529 savings plan.
  • Other options to help save money for college include Coverdell education savings accounts, high-yield savings accounts, CDs, or a Roth IRA.
  • No matter how much you save for college, you should still fill out the FAFSA and consider all federal aid, grants, and scholarships available to you and your student.

Disadvantages of 529 Plans

By June 2022, total investments in 529 college savings plans had reached $412.5 billion, with the average account balance reaching $25,903. While many people choose to save money in a 529 plan, those who are debating this strategy may want to first review the disadvantages.

Investment Options May Be Limited

A 529 plan is not the same as a traditional savings account. Rather than simply earning interest, money added to a 529 plan can be invested, typically in mutual funds, although some plans may also offer exchange-traded funds (ETFs) or individual stocks.

On one hand, that's an advantage, as investing in the market typically yields higher returns than simply earning interest. As your returns compound over time, your money has an opportunity to grow faster.

The potential stumbling block is choosing a plan with less variety in its investment offerings. For instance, you may only be able to invest in a handful of target-date funds. While target-date funds have their benefits for college savings, as they adjust their asset allocation automatically based on your child's expected college entry date, you don't have control over the individual assets within the fund. Limited investment options may not afford the level of diversification you're seeking.

Fees May Be High

Just like with any other investment vehicle, there are fees associated with 529 plans. These fees are linked to the individual investments themselves that are held within the plan. If you choose investments with higher management fees, those fees can easily detract from the returns you're earning.


With investment accounts like a 529 plan, your money has to grow that much more in order to make up for the fees that you'll pay.

A 10% Penalty Applies to Non-Qualified Withdrawals

One of the more expensive disadvantages of 529 plans centers on the 10% penalty that applies when money in the account is used for something other than qualified education expenses.

Qualified education expenses include:

  • Tuition and fees
  • Room and board for students enrolled on at least a half-time basis
  • Textbooks
  • Computer equipment and necessary supplies
  • Necessary supplies for special needs students

If you overestimate your child's education costs and withdraw more money than you need, the penalty would apply to any of the money not used for qualified expenses. On a larger withdrawal, that could add up to a sizable addition to your tax bill.

Time Isn't Always On Your Side

With college savings plans, it pays to be the early bird. The sooner you open a 529 account and start contributing regularly, the longer your money has to grow. It also has longer to recover from market ups and downs, which may naturally occur during the time frame in which you're saving.

If you're getting a late start, you may have to play catch-up by contributing larger amounts in order to reach your target college savings goal. You also have a shorter window for seeing your investments recover if market volatility results in losses in the last few years before your student goes off to college.


You can contribute up to $16,000 per 529 savings plan, per child, per tax year—and it won't trigger the gift tax. That contribution amount doubles for married couples.

Benefits of 529 Plans

Among the top benefits of 529 plans are tax-deferred growth and tax-free withdrawals when savings are used for qualified education expenses.

Additionally, 529 savings plans can be used for elementary and secondary education expenses at private schools, along with college expenses. With the ability to enroll in almost any state's plan, regardless of which state you live in, 529 accounts offer flexibility and freedom of choice. And, unlike a Coverdell education savings account, 529 savings plans don't require mandatory withdrawals by the beneficiary's 30th birthday to avoid a tax penalty. In fact, a leftover 529 plan can be rolled over to a new beneficiary, a process that may be continued indefinitely until the savings are exhausted.

Regardless of these benefits, there are still disadvantages as outlined earlier. Consider both, plus other options, when saving money for college.

Is There a Better Way To Save for College?

All things considered, the disadvantages of 529 plans can be outweighed by their advantages. For some parents, however, it might make more sense to save elsewhere.

A Roth IRA, for example, could double as a college savings account as well as a retirement account. With some exceptions, you're allowed to withdraw the original amount you've contributed without paying income tax or an early withdrawal tax penalty. There's no 10% penalty when Roth IRA withdrawals are used for qualified higher education expenses. Ordinary income tax may, however, apply to any earnings withdrawn from your account prior to age 59 1/2.

Of course, using a Roth IRA for college isn't perfect either. If you don't follow the rules carefully, you could still trigger income tax or penalties. And the money you're withdrawing for college is money you'll no longer have in savings for your own retirement.

If you're not completely sold on a 529 plan, saving in a high-yield savings account or CD account is another alternative to consider. You may not see as much growth compared to a 529, but it would allow you to keep your retirement savings intact while still planning for your child's education. Other accounts to explore include custodial accounts and a Coverdell education savings account.

Frequently Asked Questions (FAQS)

How do 529 plans work?

You can open a 529 savings plan as soon as a child has a Social Security number. The withdrawals on these tax-advantaged accounts can be used for elementary, secondary, and college tuition and expenses, as well as for some qualified student loan payments. There are two types of plans—prepaid tuition plans and education savings plans—and every state, plus Washington D.C., offers some kind of 529 plan.

What can 529 plans be used for?

529 savings plans can be used for college and for elementary and secondary school tuition and expenses. You can also use the money to pay off up to $10,000 of qualified student loans for the beneficiary, plus an additional $10,000 for qualified student loans that belong to the beneficiary's siblings (this is a lifetime limit per person).

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  2. U.S. Securities and Exchange Commission. "An Introduction to 529 Plans."

  3. FINRA. “529 Savings Plans.”

  4. IRS. “Publication 970, Tax Benefits for Education.”

  5. Fidelity. "How To Spend From a 529 College Plan."

  6. College Savings Plan Network. "Common 529 Questions."

  7. Investor.gov. “Investor Bulletin: 10 Questions To Consider Before Opening a 529 Account.”

  8. IRS. “Topic No. 310 Coverdell Education Savings Accounts.”

  9. IRS. "Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)."

  10. Fidelity. "The ABCs of 529 Savings Plans."

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