Potential Advantages:The tax-deferred growth and potential tax-free withdrawals associated with a Section 529 make it very attractive to individuals who want to maximize the growth of their college savings.
While other plans (such as the Coverdell ESA) offer this feature, the Section 529 allows for a parent or donor to remain in control of the assets indefinitely, even allowing them to close the plan and get their money back (subject to penalties).
Additionally, the Section 529 plans provides for in-state income tax deductions for 33 different states, as well as being shielded from a number of state’s financial aid calculations.
Potential Disadvantages:While there are fewer downsides to the Section 529 plans than many other accounts, there are still some to be aware of. The biggest being that distributions from Section 529 plans for pre-college expenses (grades K-12) are not considered qualified expenditures.
Additionally, the investment options in a Section 529 may be limited to 10-30 mutual funds, whereas other types of accounts have virtually the entire mutual fund universe available for purchase.