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One common type of savings plan that can be used for college savings is a 529 plan. In simplified terms, a 529 plan is a tax-advantaged investment account specifically designed for education expenses.
Here's how it works:
You, as the account owner, open a 529 plan and contribute money to it regularly. The funds you contribute are invested and have the potential to grow over time. The earnings on the investments are not subject to federal taxes as long as the funds are used for qualified education expenses.
Qualified education expenses typically include tuition, fees, books, supplies, and certain room and board costs at eligible educational institutions. This can include both undergraduate and graduate programs.
One advantage of a 529 plan is that it allows for larger contributions compared to other college savings options. Additionally, some states offer state income tax deductions or credits for contributions made to their specific 529 plans, providing additional incentives for savers. It's important to note that each state has its own 529 plan with its own set of rules and investment options, so it's a good idea to research and compare plans to find one that best suits your needs.
Overall, a 529 plan can be a beneficial way to save for college expenses due to its tax advantages and potential for investment growth over time.
A 2023 feature that was added by the Secure Act 2.0 was the ability for an unused amount of the 529 plan to be rolled over to a Roth IRA - as long as certain conditions are met.