Missouri's 529 college savings plan - How does it work?

My parents and I have been discussing college financing and we live in Missouri. They mentioned something about a 529 college savings plan. Can someone tell me more about how this works? What are its major benefits and potential drawbacks?

A 529 college savings plan is a type of investment account you can use for higher-education savings. What's great about these plans is that your earnings grow federal tax-deferred, and the withdrawals are also tax-free as long as you use them for qualified higher education expenses such as tuition, fees, room and board, computers, etc.

In Missouri, the plan is called MOST - Missouri's 529 Education Plan. It’s available to any U.S. citizen or resident alien with a valid Social Security number or other taxpayer identification number. The great thing about Missouri's 529 plan is that it offers a state tax deduction for contributions. For 2021, the maximum annual state tax deduction was $16,000 if you're married and filing jointly ($8,000 if you're single).

Here's how it works: you (or your parents) open the account and designate a beneficiary, usually the prospective student. Anyone can contribute to the account, and the contribution limits are quite high—up to $550,000 in Missouri. The money gets invested and the account can grow over time, ultimately helping pay for your college costs.

About the potential drawbacks: if you use the money for non-qualified expenses, the earnings portion of the withdrawals will be subject to income tax and an additional 10% federal tax penalty. Withdrawals may also affect financial aid eligibility. From a return perspective, like any investment, it is also subject to market risk which means the value may fluctuate, and there's a chance of losing money.

Also, remember that even if you have a 529 Plan in Missouri, the beneficiary can use the funds at any eligible institution around the country, not just schools in Missouri.

So, to summarize, some major benefits of a 529 plan include federal and often state tax advantages, high contribution limits, the ability for the account to grow over time, and flexibility in choice of school. The potential drawbacks include penalties for non-education expenditure, impact on financial aid, and investment risk. As with any investment, it's worth considering your family's financial situation and possibly seeking advice from a financial advisor.