Dave Says...

by: 

Dave Ramsey
Jun 30, 2010

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Dear Dave,

I, a mere mortal, am trying to understand 529 plans for college savings. Is the money put into the plan completely exempt from taxes or is only the growth exempt?

Shannon via email

Dear Shannon,

I understand what you're saying about the mere mortal thing. It's like you need an advanced degree of some kind to understand half of that stuff. To start with, I don't recommend 529 plans. The only reason you'd want to use a 529 plan is if you'd maxed out your Educational Savings Account (ESA), or if you make more than $200,000 a year. If you're making that kind of money, then you don't qualify for an ESA and you'd have to look at a 529.
Many of the 529 plans are very inflexible, and no, the money's not exempt from taxes - only the growth is exempt and it's only exempt if you use it for college. I don't understand why so many financial planners are getting excited and turning back flips over the 529. Ninety-eight percent of Americans qualify for the ESA, which is totally flexible. With the ESA you get to choose the investment, you don't lose control and it grows tax-free just like the 529.

You should always do an ESA before you even consider a 529. There are lots of down sides to the 529, particularly the fact that you completely lose control of the investment.

- Dave

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