A 529 College Savings Plan is a tax-advantaged investment account that helps your family save for college. You contribute with post-tax dollars, and then it grows tax-free and withdrawals are tax-free for qualified higher education expense (e.g., tuition & fees, room & board, books, computer). If you use the earnings for a non-qualified expense, you must pay taxes and a 10% penalty.
In other words, a 529 Plan works like a Roth IRA, but for college.
Why is this important?
- Your savings grow over time. Compared to a typical checking or savings account, money in a 529 Plan is invested so it compounds over time.
- You receive tax benefits on the growth. Earnings are not subject to federal income taxes nor, in most cases, state taxes. That means more money in your pocket!
- You retain more flexibility than you might think. You can always withdraw your original contribution (the “principal”) without additional taxes or penalties, and the earnings portion can be surprisingly flexible too.
Ready to learn more? Follow our posts and we’ll share everything you need to know before opening your own 529 College Savings Plan.