A 529 plan can help you save more money than a traditional savings account because:

A 529 plan can help you save more money than a traditional savings account because:

a. it is created and managed by universities.

b. the withdrawals are tax-free for qualified education expenses.

c. the grades you earn in school affect how much interest you can earn.

d. it offers higher interest rates.

Answer: b. the withdrawals are tax-free for qualified education expenses.

A 529 plan is an investment instrument approved by the federal government that allows the benefactor to save upwards of the expenses of education in the future. The way that would enable the 529 plan to enable you to save more than a normal savings account is because withdrawals from the 529 plan are tax-free if used to meet the qualified tuition expenses.

These tax savings could mean very big savings ultimately. For example, one family and the other together save $5000 per year for the education of their child for 18 years of course. A Family chooses to open a savings account as seen in the diagram above while B Family chooses to open a 529 plan as seen in the above diagram. Furthermore, at a $6% annual return and the tax bracket of 22%, Family A would receive about six hundred and sixty thousand ($160,000) after taxes while Family B could let’s say Clinch about seven hundred and ninety thousand ($190,000) tax-free for qualified expenses – the difference, therefore, being thirty thousand ($30,000).

Most of the allowable education expenses entail tuition fees, class and other related fees, books, and equipment necessary for enrolment in qualified institutions of higher learning. Depending on the tradition, meals, as well as a place to stay, computers, and internet may also be provided. This particular growth and withdrawal plan is tax-free, thus more of the money saved is dedicated to funding the cost of education.

That would be explained by the fact that although 529 plans share this important tax advantage, not all of them have a higher interest rate than the general traditional savings account. The advantage of growth consists in lower taxes and a wider range of possibilities to invest which can provide greater earnings in the long term. However, just like any other form of investment, there also entails a form of risk which entails losing your capital or investments and there is no guarantee that you shall earn your capital back.