Accumulate savings faster with tax-deferred growth
The money you earn in a 529 plan is not subject to federal or state income taxes as long as it remains in the plan. This can help your account grow faster since all of your earnings can be reinvested, increasing returns with tax-free compounding.
Withdraw earnings without being taxed
In addition, no federal or state** taxes are due when money is withdrawn from your 529 account and applied to qualified expenses: tuition, room and board, books, supplies and fees at most colleges, graduate schools and universities.
The returns are hypothetical and do not represent the performance of any investment. This illustration assumes that no withdrawals are made which would not qualify as educational expenses. This hypothetical graph is intended to compare a taxable investment account and a 529 tax-deferred account under the following assumptions: A) one lump sum contribution of $60,000 of after-tax amounts is invested and all earnings, gained at annual average rate of 7%, compounded annually, are continually reinvested and B) the taxable account is subject to an annual income tax on earnings at an aggregate rate of 30% (which may be both federal and state). No assumptions are made as to the disposition of the accounts following the 10th year. Source: Savings for College
*Withdrawals which are not for qualified higher educational expenses may be taxed as ordinary income and may be subject to a federal 10% additional tax.
** Earnings withdrawn by AL residents from a non-AL plan are subject to AL income tax.