Saving money for your child’s education is an important thing to do, especially with tuition costs rising each year. Two of the most popular educational savings plans are the 529 College Savings Plan and the Coverdell Educational Savings Account (ESA).
Both college savings plans offer tax advantages and may be good options depending on your needs. This article compares Coverdell ESA and 529 Plans.
The 529 College Savings Plan offers a more flexible plan for many people, so I thought I would share some of the tax advantages of saving for your child’s college education with a 529 College Savings Plan.
Tax Advantages of the 529 Plan
There are several major advantages to using a 529 College Savings Plan as a college savings vehicle.
- Tax exempt earnings. 529 earnings grow free from federal income tax as long as your withdrawals are used to pay for college expenses.
- Tax exempt withdrawals. Withdrawals from a 529 Savings plan are exempt from income taxes when used for qualified higher education expenses.
- Tax deductions and/or credits. Some states offer a state tax deduction or credit for contributions made to9 a 529 Savings Plan. Here is a list of states that offer this benefit.
Tax Disadvantages of a 529 Savings Plan
If you decide to make withdrawals from your 529 Savings Plan for something other than higher education expenses, you may be hit with penalties and taxes. In fact, the penalties are similar to the early withdrawal penalties for retirement fund. Any accumulated earnings are taxed, and you must pay an additional 10% penalty on your earnings.
Check with your 529 plan for more details
This article only includes a brief overview of the advantages and disadvantages of 529 plans. For more information, I recommend checking with the IRS or your individual plan.
Recommended articles about 529 plans:
- Coverdell Educational Savings Accounts (ESAs).
- 529 College Savings Plans vs. Coverdell ESAs
- Our Son Just Turned One, Starting College Tomorrow.
- How to open a 529 college savings plan for your children.
- 529 Plan and College Savings: Should We Contribute?
- College Savings and Investing With 529 Plan and ESA.
Each state can offer their own 529 college savings plan and there may be differences among plans offered.