In order to get the most bang for your college savings, you’ll need to understand how college is structured and how much you should be saving.
Read more about college savings accounts: We’ve been covering college savings for years now, and the fact that it’s still a big part of college life has made it the most popular investment vehicle for young people.
But what are college savings account?
What are the differences between a 529 college savings plan and a traditional savings account ?
The most important difference between 529 and traditional savings accounts is that they’re tax-deferred.
That means if you want to save more, you don’t have to pay income taxes on the money you save.
However, if you don´t have enough to pay the income tax on, 529s are considered a “qualified education savings plan” (QEDSP), and therefore you have to file a federal income tax return on the account.
This means that your money won´t go into a Roth IRA, which is the traditional form of investment account, and instead will be deposited into a 529 plan.
Why 529s vs Traditional Savings Accounts?
There are a few reasons why you would want to consider a 529 savings plan.
First, they are tax-free.
If you have a 401(k) or 403(b) plan, you will not pay income tax, and 529 plans don’t qualify for the Alternative Minimum Tax.
There is also the possibility that the 529 plan may not be eligible for the tax-advantaged Roth IRA.
Lastly, 529 plans allow you to save money in an easily managed way.
For example, you can take out a 529 and save on your child`s tuition or a college fund, which will then be invested in a Roth IRM account, which can be used for college.
This all makes 529s an attractive option, as you can invest in your child´s college education while avoiding taxes.
The most common type of 529 plans are 401(b), 403(a), or 529 accounts.
401(b): 529 savings accounts that offer tax-preferred contributions, and tax-refundable contributionsIf you don�t have a traditional 401(q), 403b, or 529 plan, and you want a 529, you might consider a 401 account, a 403(q) or 529 savings account.
401(a): 529 accounts that allow you the same tax-like benefits that a traditional plan provides, but without the taxes, and no income taxes.
403(i): Traditional plans that don�traditionally offer no tax advantages, but allow you an unlimited amount of tax-deductible contributions.
529 plans: Traditional savings accounts and 529 accountsThe difference between a 401 (q) plan and an 529 plan is that 529 plans will have contributions capped at $25,000.
401 (s): Traditional accounts that can offer contributions up to $10,000, while 529 plans only offer contributions capped to $5,000 for students age 18 through 25.
In addition, 529 accounts are tax deductible for tax purposes.
For example: 529 plans do not have taxable income, so they will be taxed at the same rate as any other IRA.
For 401(c): Traditional 401(ks), 401(qs), and 403(d) plans, there are no contributions limits and no limits on contributions.
If you are using a 401k or 403b account, you should check with the investment adviser about whether or not you should contribute to an IRA.