529 plans primarily benefit the wealthy

A federal review shows that the federal 529 savings plans designed to help families save money for their children's college education primarily benefits the wealthy, ABC News reports. The review by the Government Accountability Office found that less than three percent of families with college students use these plans. Wealthy families make up nearly all of the three percent who are saving.

Laura Lutton, Morningstar's director of 529 plan research, says that while the plans were designed to help families at all income levels save, that is not how the plans are being used. She also says that previous research indicated 49 percent of the plans are sold through financial advisors; many who use financial advisors have more financial means than the average person. The tax-free earnings from 529 plans benefit higher income households more because they're taxed at a higher rate.

Qualified tuition plans, or 529 plans, allow parents or grandparents to set up savings plan for children at birth. These plans are sponsored by states and educational institutions. Since 2001, funds from 529 accounts can be entirely tax-exempt as long as they're used to pay for tuition and feeds.

These 529 accounts may be set up as prepaid tuition plans or college savings plans. Each state offers at least one type. With prepaid tuition plans, savers purchase credits or units at participating colleges for future tuition. Most of these plans are sponsored by the state and require residency within that state. The advantages to the prepaid tuition plan are that tuition is locked in at current prices, and the plans are guaranteed by the state.

College savings plans are accounts where funds are invested in stocks, bonds, money market accounts and more. The investment options become more conservative as the child approaches college age. There are no residency requirements for college savings plans, a broader range of college costs are covered, and there are no age limits. These plans are not guaranteed by the state and are subject to market fluctuations.

Obstacles preventing more families from investing in 529 plans include having too many expenses to save for college, confusion over which plan to choose and concern over how investing in these plans will impact financial aid for their children.

Do you have a 529 savings plan for your child? What, in your opinion, are the advantages and disadvantages of these plans?

Photo courtesy of Dan Zen via Flickr.