In efforts to spare their kids from leaving college with a massive student loan debt burden some families are turning to draining their emergency fund or retirement accounts. While this is one option, it is likely not the best strategy for avoiding student loan debt. What many people don’t know is that there is a way to save for their child’s college expenses that is tax free on earnings, growth on the funds, and interest earned. Its’ called a 529 Plan.
A 529 Plan is a state or educational institution operated education savings plan. Named for a Section of the IRS Code it was created under, these plans allow for the investment to grow tax-deferred and distributions for the payment of college costs to be tax-free. In other words, you don’t pay gains taxes each year as the fund grows and as long as the funds are used to pay for college tuition the withdrawal of those fund is also not taxed.
These plans are also donor controlled, meaning you stay in control of the funds for withdrawals and other account decisions. They are also low maintenance in that once you enroll you can set up automatic deposits and let the funds grow without constant need for attention. The 529 Plan is available in nearly every state and applicable to just about any educational institution, even one that is out of your residency state.
To learn more about 529 Plans, visit: http://www.savingforcollege.com/intro_to_529s/what-is-a-529-plan.php