Is a 529 worth it in this case?

DigitalDad
Sat, 05 Oct 2019 05:02:00 +0000

The first key benefits of 529 is of course the tax-free income accrual (and disbursement) - which only matters if taxes ARE an issue.
But in cases where taxes DO matter, than the tax-free income means you get a higher ROI without having to seek out higher-risk, taxed investments.

The other benefit is state specific, as some states offer additional “local” features.
Finally, the 529 doesn’t have income ceilings - so it’s one of the few ways that high-earners can participate in a tax-free investment plan.

On the downside, 529s are among the most restrictive. If “life happens”, and it’s the last/only child and the saved amount is never fully spent on qualified higher education, then penalties await. If there’s any doubt at all, then a Roth IRA can be a great alternative, because it can be used EITHER for the kids’ higher education (e.g., graduate school), or remain with the parents for THEIR retirement if kids land a job after the first 4 years.

Given that you need the funds to be available in only a few years, you have very little room to recover from any potential down-markets.

If you won’t be saving taxes and there are no state-specific perks for your 529, then you might as well just stick with fix income investments that will come due when you’ll need the cash.