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Word of the Day Wednesday: Tax-Deferred College Savings Plan

Each Wednesday, MEFA will feature a Word of the Day, in which we’ll highlight a word (or sometimes a phrase) related to the college planning process. This month, we’re focusing on vocabulary related to saving for college.

Today’s Word of the Day is Tax-Deferred College Savings Plan.

A “tax-deferred” investment means that earnings such as interest accumulate tax free until the earnings are withdrawn. This is a benefit to the investor, as any savings with tax-free growth will grow unhindered. Essentially, this means the investment can grow faster and be worth more than any investment on which taxes are paid on the earnings throughout its growth.

In the case of 529 college savings plans, the investment grows tax deferred AND, if the money is withdrawn for qualified education expenses in the future, the investor never pays tax on the earnings. This is a huge benefit to a family saving for college and one of the reasons 529 plans have become such a popular way for families to save. See the example below, highlighting how differently an initial investment of $26,000 can grow in a taxable account compared to a 529 plan account.

[caption id="attachment_1750" align="aligncenter" width="600"]tax deferred This example is an estimate only and market conditions may change.[/caption]

 Why does this matter to you?

You have many options when it comes to saving for college. It is important to understand the benefits of each, and how your savings will grow depending on your savings vehicle.

MEFA can help you sort out all you need to know about saving for college and the differences in savings options. Join us for a webinar or seminar, or read about the U.Fund, the Massachusetts 529 College Savings Plan. Visit the U.Fund page to learn more about this great college savings option and to find out how you can easily start saving today!


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