A 529 plan is a tax-advantaged savings account designed to help families save for future education expenses. Contributions to a 529 plan grow tax-free, and withdrawals are also tax-free if used to pay for qualified education expenses, such as tuition, room and board, books, and supplies.
There are two main types of 529 plans:
- College savings plans: These function like investment accounts, where funds can be invested in a range of options (e.g., mutual funds, ETFs), and the account grows tax-free over time.
- Prepaid tuition plans: These allow families to purchase future tuition credits at today’s rates, locking in the cost of college education.
The tax benefits of a 529 plan include:
- Tax-free growth: Contributions to a 529 plan grow without being subject to federal income tax.
- Tax-free withdrawals: Funds can be withdrawn tax-free if used for qualified education expenses.
- State tax deductions: Many states offer tax deductions or credits for contributions to a 529 plan.
The funds in a 529 plan can be used for a variety of educational expenses, including K-12 tuition, college tuition, apprenticeships, and even student loan repayments (up to a certain limit). 529 plans are a flexible and powerful tool for saving for education, providing significant tax advantages to families planning for their children’s future.