3 Reasons Why Parents Today Aren't Using 529 Plans

The cost of college keeps rising. And even if you're vigilant about saving for it, you may be worried you'll inevitably fall short. 

That's why it's important to not just save for college, but invest your money. And while you may be inclined to do so in a regular brokerage account, a 529 plan could be a better bet.

But recent data from Vanguard reveals that a lot of parents seem opposed to 529 plans. Here are three reasons these accounts aren't being utilized -- and why they're not necessarily good ones.

1. Parents don't know enough about how they work

For some parents, the hesitancy to open a 529 plan stems from a lack of knowledge about how they work. But actually, these plans are pretty simple to understand.

Different states sponsor 529 plans, but you aren't limited to opening a 529 offered by your state of residence. The money you put into a 529 will not result in a federal tax break, but your state might offer some tax incentives, particularly if you invest in a plan sponsored by your state.

The benefit of funding a 529 plan is that your investments in that account get to grow tax-free. And withdrawals are tax-free, provided that money is used for qualifying education expenses. 

Those aren't just limited to college, though. You can use money in a 529 plan to pay for private school when your kids are younger.

2. Parents don't believe they have enough money to fund one

There's generally no minimum amount of money required to open a 529 plan. So if you only have a few hundred dollars to allocate for college savings, so be it. 

Of course, if your goal is to be able to mostly or wholly cover your kids' college tuition, then you'll clearly need to try to ramp up over time. But you can get started with a tiny amount of money if that's all you have available.

3. Parents fear their money will go to waste if a child doesn't go to college

It's true that non-education withdrawals from a 529 plan are subject to penalties and taxes. But those only apply to the gains portion of these accounts, not principal funds contributed. To put it another way, if you funded your 529 plan with $50,000 and your balance is eventually worth $90,000, using all of that money for non-education purposes would result in taxes and a penalty on the $40,000 gains portion only.

You should also know that 529 plans allow you to switch beneficiaries without penalty. So if one child of yours opts out of college, you can use that money to pay for your other child's expenses. 

You should also know that starting next year, you can roll up to $35,000 in 529 funds into a Roth IRA without a penalty. So if your child doesn't need the money for college, it can be used for retirement instead.

A 529 plan isn't necessarily the best college savings choice for everyone. But you may want to consider using one due to the tax benefits involved. And you may feel more comfortable opening one now that you know a bit more about how these plans work.