Death and taxes… There’s no such thing as a free lunch… Umm, the Postman always ring twice? Hm, well maybe not that last one, but my point is we all know the cliches about things that are hard to avoid or hard to get. Fortunately, if you’ve got a future college student in the house, a simple college savings solution is not one of those things.
As the customer service representative for Freshman Fund, I’ve had more than a few people ask me about 529 college savings plans, and how they’ve heard it’s not the best way for everyone to save for college.
It’s true 529s aren’t the automatic solution for every college saver on the planet, but for most parents they are the best choice. So do your homework, but know that for the majority of American families with 5 or more years left to save, 529s are the preferred choice, not the alternative.
So why 529s? What’s their secret?
It’s simple. Zero taxes.
529 investors pay no income tax and no capital gains tax on interest earned by their 529 savings as long as the funds are used for qualified expenses like college tuition, board, books, and so on.
Putting what normally goes into the tax-man’s pocket towards your child’s college bill gives 529s a big advantage over most other ways to save.
How big? Well Joe Hurley of SavingForCollege.com, the reigning world-champion expert in all things 529, recently presented an interesting analysis of the real dollar advantages of a 529 versus a taxable account such as a regular mutual fund. It’s a historical analysis showing that from 1988 to 2007, a $10,000 investment would have experienced 34% more growth in a tax-free 529 than in a taxable account.
So while I can’t promise a free lunch for you, a well-tended 529 and some tax-free savings just might give your future freshman quite a few meals courtesy of Uncle Sam.
Tags: 529, getting started, taxes