529 College Savings Plans

by ABC

If you have kids then future educational expenses are something that should be planned for.  One investment tool for educational saving is called the 529 plan.  In this article we are only looking at the 529 savings account (not the pre-paid plan).

529 plans are investment accounts which have tax advantages if used for educational purposes.  The main benefit compared to a normal investment account or high-interest savings account is that there are no taxes on any kind of income within the account.  In a high-interest savings account, any interest will be added to your taxable income for that year and taxes will have to be paid.  In the 529 plan, there are no taxes so there will be more money for school expenses.

How it works

The 529 plans are run by various states – you have to choose which state plan you want to set up (you can have more than one).  Then you set up an account, make some basic investment choices (if applicable) and start contributing.

Some important features about 529 plans

  • These accounts are intended for post-secondary educational purposes and have penalties if the money is not used for that purpose.
  • Tax sheltered – any income, dividends, capital gains earned in the accounts are not taxed.
  • After tax money is used to contribute to these accounts. This means that there is no tax refund for any contributions (some states are the exception however).  No taxes are levied when using the funds for educational purposes.
  • 529 plans are limited to mutual funds and annuities.
  • These accounts are intended for post-secondary educational purposes and have penalties if the money is not used for that purpose.

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