The Worst Part of a 529 College Savings Plan

People love to compartmentalize savings by goals. It’s easier to manage and track your progress if you can save for college, retirement, emergencies, home remodel, etc. in individual accounts. So when it comes to saving for your child’s education a 529 can be a great place to put your money for all practical purposes. The account is specifically designed for education and performs similar to a Roth IRA. You contribute on an after-tax basis but gains are tax-deferred and withdrawals used to pay qualified education expenses come out tax-free. Taxes can have a significant impact on your savings potential, so the tax mitigating benefits of a 529 seems like a natural fit for your college savings. So, what could possibly be the drawbacks?

You can find many online articles by financial organizations and professionals highlighting the disadvantages of a 529 plan, including limited investment options, potential impacts to financial aid eligibility, short time horizons, and the most common of all, the potential for tax and/or penalties if you don’t use the funds to pay for education expenses. Now all of these disadvantages hold water and should be weighed against some pretty powerful benefits. However, in my professional assessment, the worst thing about a 529 plan is that you have to drain the money in the account to pay for college and cannot fill the bucket back up to save for your own financial future. Now this might seem like no big deal since you’re saving in various accounts for your other goals, but let’s take a deeper look.

Many parents are in their peak earning years by the time their kids’ graduate college and thus start looking for places to save more money. They know they haven’t saved enough. They were so overwhelmed paying for massive education expenses that they weren’t able to put as much away for their future as they had hoped. But, now those expense are done, the kids are out of the house and they’re looking to sock away significantly more money than they were able to during the child rearing years. The natural solution is to contribute to their retirement accounts, but those can be quickly maxed out leaving them with no efficient place to save their money. In addition, when they were forced to drain their 529 savings to pay for college, the power of compound interest was instantly interrupted and killed. The money they withdrew was gone forever, and what they could have earned on that money in the future was also lost forever.

It might be simpler to compartmentalize your savings into certain accounts by goals, but is it efficient? If you’re heading from Boston to Los Angeles, you can take many different modes of transportation to get there, such as cars, buses, trains or airplanes, but which mode is most efficient? What if instead of saving in a 529 you could save after-tax dollars in an account that allows you to defer the taxes on the growth, take the money out tax-free (for whatever purpose you want) and then fill that account back up for your own retirement? Would that benefit you? In addition, what if you had the option to access your money without interrupting compound interest? Would that help you manage your money more efficiently? 529s are not a bad savings vehicle by any means. The question you should be asking is whether or not a 529 provides the confidence and efficiency you’re looking for in achieving your desired outcomes.


This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Harmon Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

Develop A Growth Mindset to Better Manage Your Money

According to researcher and Stanford Professor, Carol Dweck, there are two mindsets that you can hold: fixed or growth. A person with a fixed mindset believes that talent and ability are predetermined, where as a person with a growth mindset believes that their talent and ability can be developed with time and effort. Consequently, those with a growth mindset desire to "improve themselves," while those with a fixed mindset tend to feel the need to "prove" themselves.

When it comes to managing our money wisely we don’t want to fall victim to a fixed mindset. So, in order to help you develop and maintain a growth money mindset as you start a new year, here is a handy table that can help you avoid some common traps and get on the path to improving your financial health.


I believe most of us desire to be financially responsible with our money, but get lost in the busyness of work, raising a family and taking care of a home. However, if you’re truly focused on developing a growth mindset to improve your financial situation, you need to prioritize what’s important, take responsibility and put in the work. If you get stuck, surround yourself with people that can help you move forward. Many people with a growth mindset lean on their financial planner to educate them on their opportunities and risks so that they can make wise decisions with their money. So, as Dweck says, “What will you choose? A lifetime of proving yourself or a lifetime of improving yourself?”

The College Planning Remedy: It's Advice .. NOT Information

Determining your best strategy to pay for college and stay up to speed for retirement can be a confusing and complex task.  The media, friends, family, co-workers and financial advisors are all common sources of information on college funding.  However, the problem facing parents today is not a lack of information.  If anything, there’s so much content available today that many parents find themselves overwhelmed and end up procrastinating or avoiding planning all together.  You don’t need more information.  You need good advice.  But, the problem with mass content is that it is unable to speak to your own unique situation, which means that taking blanket advice could end up costing rather than saving you money.  To illustrate, let’s look at the flaws of some well-intentioned college advice:

“It’s all about the FAFSA”

Parents of high school seniors are bombarded with information regarding the FAFSA (Free Application for Federal Student Aid) and are told to go online and complete it without delay as soon as October rolls around.  This isn’t necessarily bad information and will likely be good advice for many parents.  But, what if your child is most interested in attending one of 260+ colleges that also utilizes the CSS Profile (aid form) to determine your student’s eligibility for an institution’s own lucrative grants and scholarships?  Families looking at these types of schools would benefit more from placing a higher priority on completing the much more involved CSS Profile rather than the FAFSA.  This is simply due to the fact that large grants and scholarships are likely to lower the overall cost of college more significantly than a federal loan, Pell grant or work-study.

“Never Save in Your Child’s Name”

It is often recommended to avoid saving assets in your child’s name.  This is because student-owned assets typically count more towards your expected family contribution (EFC) than parent-owned assets.  Therefore, your aid eligibility will drop more significantly if you save in the child’s name rather than the parent’s name.  But, this isn’t always true!  For example, on the FAFSA, assets saved in a 529 or Education Savings Account actually count as a parent asset regardless of who owns the account.  In addition, some of the most prestigious colleges in the nation will count parent and student assets equally.  Finally, what if your income alone disqualifies you for need-based aid?  In this situation, saving in the child’s name could be a great strategy to pay for college due to the tax benefits.

In short, the answer to every financial planning question is always, “It depends.”  There are so many variables and moving parts associated with paying for college.  What is true for one family may not be true for another.  You need to plan ahead of time to know how the financial aid formulas will apply to your own family.  This will allow you to determine which colleges offer your family the highest affordability and what tactics you can implement to maximize savings. You can borrow to pay for college, but you can’t borrow your way through retirement.  Therefore, you also need to understand how your plan for college funding will impact your retirement goals.  You don’t need more information.  You need sound advice that speaks to your unique situation so that you can pay the college tolls as wisely as possible, cruise through the EZ Pass Lane and stay up to speed for retirement.

Source: Stratagee/T. Onink