College Savings Plans Offer Tax-Friendly Way to Save for Future Education Expenses

College Savings Plans Offer Tax-Friendly Way to Save for Future Education Expenses

College Savings Plans, known as “529 qualified tuition programs,” have become very popular in helping families save and prepare for their children’s higher education expenses in recent years.  However, many investors, are still unaware of the generous tax benefits* these accounts provide, as well as the broad flexibility of how the money can be utilized once the child is ready for college.
If you contribute money to a 529 College Savings Plan, it’s important to first know that you control the investments, and therefore the risk and future potential growth of the money—which is ideal, of course.  Assuming the money grows over the years and is later withdrawn to help with education expenses of the child, the growth over and above your contributions is tax-free. Not just tax-deferred, but tax-free…nice benefit. The money must be spent on “qualified” expenses for this to be true though, of course.  Instead of saving money for your child’s future education in a savings account or brokerage account where the gains are taxable each year, consider a 529 plan.

Fortunately, “qualified” expenses that allow for tax-free withdrawals from the account are very broad.  No matter if the child attends a school in-state or out-of-state, the money qualifies for the tax-free status.  This is a differentiating feature versus other state-run prepaid tuition programs. Also, the money can be used for undergraduate expenses, or post-graduate level expenses; a vocational or technical school, community college or university; and also, for a plethora of costs, such as tuition, room and board, books, a computer, and so forth.

Consult your own Financial Advisor and tax advisor about whether a 529 College Savings Plan is right for your family, but if you have children who will be college-bound in a few years, this type of plan may help you save in a very efficient manner.

*Some states provide benefits including state tax incentives to residents who invest in their home state’s 529 plan. And six states – Pennsylvania, Arizona, Missouri, Minnesota, Montana and Kansas – provide for state tax parity, which means contributions to any state plan are eligible for that state’s income tax deduction