Putting money into a 529 plan is a really good option for parents or grandparents trying to finance a child’s education, says Diahann W. Lassus, president of wealth management firm Lassus Wherley and Associates. As long as you use the money you put into the plan for qualified education expenses, the income on it is not taxed.
“These plans also offer a lot of flexibility,” says Lassus: If one child decides not to go to college, then the beneficiary of her account can be changed. Also, if you run into tough times, you can take back the principal without penalty. However, any earnings will be taxed and assessed a 10 percent penalty.
And just as important, the earnings in the accounts grow on a tax-deferred basis. The savings here can be substantial: If you saved for educational expenses in a regular mutual fund, your federal income tax on earnings from that fund could increase from 15 percent in 2012 to as much as 43.3 percent in 2013 for high earners.
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