How 529 Plans Work


529 plans aren't completely perfect investment vehicles – they do have some drawbacks. For one thing, you don't control the specific investments being made with your money. Like any other investment plan, the brokerage or investment firm that handles that particular plan controls the specific mix of investments the money will be used for. For example, you can't buy, trade or sell individual stocks with your 529 money. We'll talk in more detail about your level of control over the 529 investment in the next section.

There are other disadvantages to having a 529 account as well. As we said before, if you have to withdraw the money for some reason other than to pay for qualified higher education, then you pay tax on the earnings and a 10 percent penalty. There are some limits on what you can deposit into the account as well: You can only make cash contributions to the account; stocks can't be rolled over into it.

If you have multiple children or grandchildren, keep in mind that each beneficiary must have his or her own account. Siblings or cousins can't share an account (although, as we mentioned, you can roll an account over to a different beneficiary).