Saving for your child’s future is one of the most meaningful investments you can make. But when it comes to deciding how to save for higher education, it can be challenging to know where to start. Should you use a 529 plan or a savings account? And if you already have money in a savings account, is it worth moving those funds into a 529 plan? Let’s break down the answers to these questions.
Should I Use a 529 Plan or a Savings Account to Save for Higher Education?
The decision between a 529 plan and a savings account largely depends on your goals and priorities. Here’s a comparison:
- 529 Plan: A 529 plan is specifically designed to help families save for education. It offers tax advantages, investment growth potential, and flexibility in covering a range of qualified education expenses including tuition, books, and even room and board.1 There are also federal gift tax benefits. Contributions up to $19,000 per year per beneficiary are excluded from federal gift taxes, making the 529 plan an excellent way for grandparents and other family members to contribute.
- Savings Account: A traditional savings account is a flexible and low-risk option. There are no restrictions on how you use the money, but interest rates are typically low, meaning your money grows more slowly compared to the potential returns of a 529 plan. Additionally, savings account earnings are subject to federal income tax, reducing your net growth.
The answer: If your goal is to save specifically for education, a 529 plan is a smart option because of its tax benefits and growth potential. Check out the “Should I use a 529 plan or savings account to save for college?” Ask Penny video to learn more.
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Is It Worth It to Move Savings Account Funds into a 529 Plan?
Yes, it’s often worth moving funds from a traditional savings account to a 529 plan, especially if you plan to use the money for college or other education-related expenses. Here’s why:
- Tax-Free Growth: Any earnings in a 529 plan grow tax-free, unlike savings accounts, where interest earned is subject to taxes.
- Tax Benefits: Many states, including Nebraska, offer tax deductions or credits for contributions to a 529 plan. This can provide immediate savings on your state tax return.
- Education-Specific Perks: Moving your funds into a 529 plan ensures the money is earmarked for education, helping you stay on track toward your savings goals.
- Use Funds Anywhere: NEST 529 funds are eligible at most private and public two-year or four-year technical, trade, vocational, graduate, or professional schools.
The Bottom Line
Choosing between a 529 plan and a savings account doesn’t have to be complicated. If you’re saving for education, the tax advantages and growth potential of a 529 plan make it a clear winner. Moving funds from a savings account into a NEST 529 plan can help your money grow faster while providing tax benefits that a savings account simply can’t match.
The earlier you start saving with a 529 plan, the more you’ll benefit from compounding growth and help your loved one reach their dreams. Learn more about how a NEST 529 plan can work for your family by visiting NEST529.com.
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Important Legal Information
An investor should consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. This and other important information is contained in the fund prospectuses and the NEST Direct College Savings Plan Program Disclosure Statement (issuer’s official statement), which can be obtained at NEST529.com and should be read carefully before investing. You can lose money by investing in an Investment Option. Each of the Investment Options involves investment risks, which are described in the Program Disclosure Statement.
An investor should consider, before investing, whether the investor’s or beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s 529 plan. Investors should consult their tax advisor, attorney, and/or other advisor regarding their specific legal, investment, or tax situation.
The NEST Direct College Savings Plan (the “Plan”) is sponsored by the State of Nebraska, administered by the Nebraska State Treasurer, and the Nebraska Investment Council provides investment oversight. Union Bank and Trust Company serves as Program Manager for the Plan. The Plan offers a series of Investment Options within the Nebraska Educational Savings Plan Trust (the “Trust”), which offers other Investment Options not affiliated with the Plan. The Plan is intended to operate as a qualified tuition program.
Except for any investments made by a Plan participant in the Bank Savings Underlying Investment up to the limit provided by Federal Deposit Insurance Corporation (“FDIC”) insurance, neither the principal contributed to an account, nor earnings thereon, are guaranteed or insured by the State of Nebraska, the Nebraska State Treasurer, the Nebraska Investment Council, the Trust, the Plan, any other state, any agency or instrumentality thereof, Union Bank and Trust Company, the FDIC, or any other entity. Investment returns are not guaranteed. Account owners in the Plan assume all investment risk, including the potential loss of principal.
NOT FDIC INSURED*| NO BANK GUARANTEE | MAY LOSE VALUE
(*Except the Bank Savings Underlying Investment)
