What Is This?

Saving for the future cost of college tuition of our children, our own retirement, and purchasing a home are some of the biggest financial goals that we set for ourselves in our lifetimes. One of the biggest tools that parents have for saving for their children’s college education is a 529 College Savings Plan.

A 529 College Savings Plan is……

very similar to a Roth IRA. Your investments are deposited in a 529 College Savings Plan with after-tax dollars, and your investments continue to grow until they are withdrawn. As long as you use the proceeds for a qualified educational expense, the interest, capital gains, dividends, and any earnings are tax free.

Advantages……..

The biggest advantage is its tax advantage status. Because you invest the money with after-tax dollars, your account grows and withdraws are tax free as long as they are use for a qualified educational expense. A qualified educational expense can be anything ranging from tuition, fees, books, and other expenses. While your contributions are not tax deductible on your federal income tax return, you can also receive a tax break from your state income taxes. Benefits can also be transferred from one child to another or even used by the parent as well. The assets also remain in the parent’s name instead of belonging to the child. A parent is free to do with this plan as he or she sees fit to include withdrawing the money completely although there will be taxes and a 10% withdrawal penalty that is owed to the government if that happens.

Start Early?

You can start a this plan for your child as soon as he or she has a Social Security number. The earlier you start saving for college will allow you to capture the power of compounding interest. For example, if you were to invest $200 per month from the date your child was born until he was eighteen years-old and graduated from high school, you could amass over $96,000 into a plan, assuming an 8% annual rate of return. If you left that money in the this account for four more years until your son was 22 years-old, the nest egg would be over $143,000.

Most parents view saving for their children’s college education as a critical part of their job and a major financial goal. Using this type of plan and its tax advantages can help you achieve your goal. This is a powerful investment tool because of its many advantages. With a 529 College Savings Plan, you have the ability to withdraw the earnings tax free for educational expenses, to transfer benefits, and complete control over the assets instead of the child.