What is an Education account?
An education account, also known as a 529 plan, is an account used to save money for educational expenses, with special tax advantages. Education accounts have an account owner, who controls the funds, and an account beneficiary, whose education the funds are intended for.
Every education account is sponsored by a state, but the plan does not have to be held in the state where you live or the state where the beneficiary plans to attend school.
While education accounts were originally created for college expenses, it’s also possible to use the money for K-12 tuition.
What are the benefits of saving with an Education account?
There are several benefits of using an :
- Tax-free growth. If your account goes up in value, withdrawals you make for qualified educational expenses are tax-free. In a regular investment account, those withdrawals would subject to capital gains tax.
- Favorable financial aid treatment. 529 plans are not treated as student assets on the Free Application for Federal Student Aid (FAFSA), which may increase the amount of aid that the student is eligible for. Additionally, withdrawals by a parent (or student) account owner for educational expenses are not treated as income. Note that withdrawals from accounts held by others for the student (for example, a grandparent, aunt/uncle, etc.) will be treated as untaxed income to the student, which may reduce their eligibility for aid.
- Controlled by the account owner. The beneficiary (usually a child when the account is set up) doesn’t get control of the account when they turn 18 (or ever). This keeps you in control, to make sure the funds are actually used for educational expenses.
- No age limit. The funds can be used for older students – graduate school, medical school, etc.
- No income phase-outs for contributions or distributions. Anyone can create and contribute to an education account.
To understand the tax and other financial benefits and implications for your specific situation, please discuss with your account or other qualified financial professional.
What does tax-free growth mean?
- Investment earnings in an education account compound on a tax-deferred basis
- Withdrawals that are used for qualifying educational expenses are federal tax-free.