How does one balance savings for retirement savings and saving for a child’s education?
The Pension Protection Act relieves the stress in balancing for these objectives. When you invest in a 529 college savings plan account, your investment will continue to grow on a tax-deferred basis. When the time comes to pay the college bills, the withdrawals are free from federal income taxes—provided you use the withdrawn money to pay for qualified higher education expenses.
You are free to invest in any state’s plan, though remember you may qualify for additional tax advantages or other benefits by choosing your own state’s 529 plan. Make it a point to check on the benefits of saving with your own state’s 529 plan.
Why a 529 versus a taxable savings account?
Let us compare how much money you could accumulate over 18 years by making a one-time contribution of $24,000 to a 529 college savings plan account versus a taxable savings account.
Consider a 7% RoR compounded annually on both accounts. In a 529 account the $24,000 would grow (tax-deferred) to $81,118. The amount in the savings account on accruing interest and paying taxes @ 21.9% (federal taxes only), would be $62,562. The difference is that your 529 savings grow on a tax-deferred basis and withdrawals are federal income tax free, as long as you use them for the student’s qualified higher education expenses. For the sake of simplicity, State taxes, account fees and expenses are not taken into account.
The best gift you can give your child is an education and the Pension Protection Act, 2006 gives your gift of education the shelter from tax.
