Which of the following statements is a benefit of using a 529 plan to save for college?
1. Funds can be withdrawn at any time for any purpose without taxes or penalties.
2. You can contribute an unlimited amount annually without facing gift tax consequences.
3. Earnings grow tax-deferred and withdrawals for qualified expenses are tax-free.
4. It reduces your federal income tax bracket.
Answer:
3. Earnings grow tax-deferred and withdrawals for qualified expenses are tax-free.
A 529 plan is a state-sponsored college savings account that offers tax-free growth and tax-free withdrawals when used for educational purposes. If not used for qualified education expenses, the earnings portion of the withdrawal is subject to taxes and a 10% penalty. However, when used correctly, it’s one of the most tax-advantageous ways to save for college.
