HR Support on Tax Deferred 529 Accounts

Editor's Note: 529 plans offer a tax free way to save money for college.

Tracy MorleyOverview: Tax deferred education accounts, also known as 529 plans, are tax deferred savings accounts that individuals use to pay for tuition, books, administrative fees and other college expenses. There are two types of tax deferred education accounts:

  • Prepaid tuition plans are often sponsored by the state and have state residency requirements. The state allows participants to lock in future tuition at today's prices.
  • College savings plans allow the account owner to establish an account for a future student and choose from a variety of investment options, such as stock mutual funds, bond mutual funds, age-based portfolios and money market funds. College savings plans can be used at any college.

Account owners do not pay federal taxes on the earnings in the account, and distributions for tuition payments are not taxed. If the funds are spent on something other than educational expenses, that money may be subject to income taxes and a 10 percent federal tax penalty.

Author: Tracy Morley, SPHR, Legal Editor

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