It’s no secret the cost of college has and continues to skyrocket. It makes it very difficult to go to college debt free. This is especially true if you do not start saving early enough. If you can start saving though, you have some options. A 529 college savings plan is one of the smartest investments you can make for your child’s future success.
A 529 college savings plan is a state-administered plan. The IRS does not tax withdrawals, as long as they are made for qualifying educational expenses. As an added bonus, a 529 plan can be used for a beneficiary’s tuition expenses for elementary through high school, in addition to college, graduate school or trade school.
The rules change however, when a withdrawal is made that the IRS doesn’t consider a qualifying expense. 529 college saving plans are federally taxed, even though they are administered at the state level. If you want to use the plan to pay for a non-qualifying expense, the withdrawal will incur a 10% penalty and receive the federal tax.
That’s why you should be absolutely sure which withdrawals qualify. So here is a brief guide to assist in your decision-making on whether this type of plan is right for you.