[youtube https://www.youtube.com/watch?v=_Iqf9FpfOjw]A 529 plan is a specialized investment account that was created to help families save for future college expenses. This can be for a traditional 4-year college or university, or even a community college.

The tax benefits of these accounts are undeniable. Much like a Roth IRA, the money in these accounts grows tax-free throughout the life of the account, which means the account holder will not be subject to income tax annually.

Most of the states in the U.S. have their own state-sponsored plans; however, you are not required to use your state’s plan if you don’t want to. While the state in which you are a resident may offer some extra tax benefits for its own residents (although many do not), you may chose a plan from any state that you desire.

You may withdraw funds from your 529 tax-free, just as long as you spend that money on qualified education expenses. A qualified expense includes the following:

  • Tuition & fees
  • Room & board
  • Computers
  • Other expenses required to attend a college/university

As of this year, tuition expenses at private primary and secondary institutions are also covered by funds from a 529 plan. However, there is a limit. You may only withdraw tax-free up to $10,000 per year per beneficiary for this type of expense.

If you make non-qualified purchases with these funds, you will incur income taxes as well as a 10% penalty on the earnings portion of the withdrawal. The principal portion of your money (non-earnings money) will never incur taxes or penalties, as it was deposited with after-tax money.