A recent article in Bloomberg highlighted a trend among some parents to save for their children’s education using cryptocurrency. It’s not surprising that some investors may worry about missing out on growth, considering the price of Bitcoin has increased over 130% in the past 12 months, compared to a 21% increase in the S&P 500. But should you save for your child’s college education using Bitcoin? Here are six reasons you may want to think twice before using cryptocurrency to save for college instead of a 529 plan:
1. Cryptocurrency is subject to market volatility and risk
Cryptocurrency prices are highly volatile, often experiencing extreme fluctuations in short periods. According to data from Fidelity Digital Assets, Bitcoin was 3.7x more volatile than the S&P 500 from February 2020 to February 2024. While this volatility can sometimes lead to large gains, it can also result in significant losses, making it an unreliable way to save for a fixed expense like college.
A 529 plan, on the other hand, offers less volatile, professionally managed investments designed for long-term growth. 529 plan investments are in productive, cash-flowing assets like equities and bonds rather than speculative instruments.
2. 529 plans offer federal tax advantages not available with crypto
Earnings in a 529 plan grow tax-free, and withdrawals are also tax-free when used for qualified education expenses. These tax savings can add up, meaning you could have thousands of dollars more available for college from a 529 account compared to a taxable account.
When you sell Cryptocurrency for a profit, those gains are subject to taxes which can reduce the overall amount available for tuition and other expenses. If you hold the cryptocurrency for one year or less, you will pay ordinary income taxes on your gain, and if you hold it for more than one year, you’ll pay capital gains tax of 15 or 20%, depending on your income level. It is also important to note that transferring between cryptocurrencies, for example from Bitcoin to Ether, creates a taxable event.
3. 529 plans offer greater regulation and legal oversight than crypto
Cryptocurrency markets are loosely regulated, and there have been numerous cases of exchange failures, fraud, and hacking. Use of crypto wallets requires a vigilant sense of security; even if using a hardware wallet to eliminate hacking and phishing risk, you must keep both the wallet and secret key secure and available, taking care not to accidentally discard either, like a Welsh man did in 2013, losing out on over $700 million worth of Bitcoin in today’s dollars.
529 plans are state-sponsored and regulated, providing legal protections and oversight that crypto lacks. State sponsors have regular board meetings and transparent bidding processes for program managers, ensuring robust stewardship of account owner assets.
4. 529 plans offer state tax incentives
Over 30 states offer state tax deductions or credits for contributions to a 529 plan. Most states allow any contributor, not just the account owner, to claim the applicable tax benefits on their state income tax returns.
Crypto savings do not qualify for any special education-related tax benefits.
5. 529 plans have a minimal impact on financial aid
529 plan assets owned by a parent or a dependent student are considered a parent asset on the FAFSA, with a maximum of 5.64% of the value counted when determining a student’s financial aid eligibility.
Cryptocurrency holdings in a student’s name will be viewed as a student asset, which could negatively impact financial aid calculations. 20% of student assets are considered in the FAFSA determination of a student’s financial need.
6. 529 plans are easy to use and manage
529 plans are simple to set up and maintain, with professionally managed portfolios tailored for education savings. All 529 plans offer age-based or enrollment year portfolios that make 529 investing easy. The investments in these portfolios automatically shift from more aggressive investments when your child is younger, to more conservative positions as your child nears college enrollment age. This can help you to earn more in the earlier years, and protect your earnings from market downturns when you’re ready to start making withdrawals.
Crypto investments require active management, knowledge of digital wallets, and risk assessment, making them more complex for the average parent.
Bottom Line: 529 plans provide stability, security and unique tax advantages
While cryptocurrency is an exciting investment option, it is also risky and unpredictable for something as crucial as college savings. A 529 plan offers tax advantages, stability, and peace of mind, making it a more reliable choice for most parents planning for their child’s education.
