Section 529 college saving plans offer income tax, gift tax, estate tax, and asset protection benefits. But, in spite of all the hype and publicity (which they do deserve), 529s aren’t for everyone.
If you’re on either end of the wealth spectrum, there may be better options, which are often lost in the marketing barrage for 529 plans. While 529s may be great for most people saving for college, it depends on your specific situation…
You’re on the low end of the income/wealth spectrum. You might be better off keeping the money in your name. You might need the money for yourself. From an emotional perspective, you may not want to have your child see 529 money that he/she will assume is for college only to see you pull it out to meet a family emergency. Also: Your tax bracket may not be so high that the tax advantages of a 529 account are that significant.
You’re on the high end of the income/wealth spectrum. You might benefit your family more if, as part of an overall financial, asset protection, and estate planning strategy, you establish trusts for your children and grandchildren to which you can gift interests in family businesses or investments at a discount, fractionalize ownership of family entities by these gifts, remove future appreciation from your estate, and achieve other goals. You can, at these levels, always pay for tuition costs directly gift tax free over and above the annual gifts you can make to the trusts (currently $14,000/year)
Lesson: 529 plans, like most estate and financial techniques, are a wise choice for some people, but not for everyone. Use discretion to be sure you’re taking the steps that are right for you.