A 529 plan can be funded through automatic investing methods such as deducting from a checking or savings account. This prevents parents from having to set aside the money or make regular deposits, which can make investing easier and ensures that contributions are actually made.
There are few restrictions to investing in a 529 plan. An account can be opened with as little as $25, and there is no cap on how much can be contributed. There are also no minimum or maximum income requirements to to start a plan. Parents are free to invest in another state's plan if they don't like the offerings in their home state.
The money in a 529 plan grows on a tax-deferred basis. No taxes are paid when the money is withdrawn, as long as it is used for educational expenses. Eligible expenses include college tuition, room and board, fees, books and supplies. In some states, parents are permitted to deduct 529 contributions on their tax returns.
A downside to 529 plans is that investors don't necessarily know where their money is going. Each state hires a company to manage the investments, and the state can change companies at virtually anytime. There is also no guarantee that the 529 will earn money. In some instances, investors can even lose money.
There are costly consequences for using 529 money for something other than to pay for education expenses. Investors are subject to a 10 percent penalty and will be required to pay income taxes on the amount withdrawn. If there is any money left in the account after the child leaves college, it will also be subject to taxation.
A 529 plan can reduce the chances of receiving student aid or grants. The money in a 529 plan is considered an asset and can lower the amount of aid a student is eligible to receive.