Saving for college can feel overwhelming, but choosing the right savings vehicle can make a huge difference in how much your money grows over time. Many families default to a traditional savings account because it feels safe and familiar—but when it comes to long-term growth and tax efficiency, there’s a far better option: the 529 college savings plan.
What is a Traditional Savings Account?
A traditional savings account is a bank account where you deposit money, and the bank pays you interest. While this is a safe option, it comes with two big limitations:
- Low returns: Most savings accounts offer less than 2% annual interest.
- Taxes on growth: Any interest you earn is taxable as ordinary income each year.
This means your money grows slowly, and a significant portion of that growth is eaten up by taxes. Over 10–18 years of saving for college, the difference can be huge.
What is a 529 College Savings Plan?
A 529 plan is a state-sponsored investment account designed specifically for educational expenses. It isn’t a type of investment itself—it’s a tax-advantaged “vehicle” that allows you to invest in mutual funds, index funds, or other investments, much like you would for retirement.
Here’s why a 529 plan is powerful:
- Tax-free growth: All earnings on investments in a 529 plan grow completely tax-free.
- Tax-free withdrawals for education: As long as the money is used for qualified educational expenses—tuition, room and board, books, and more—you pay no taxes on the gains.
- Flexible investment options: Most 529 plans allow you to invest in age-based portfolios or market index funds like the S&P 500.
How Investing in a 529 Plan Can Outperform a Savings Account
If you invested in the S&P 500 through a 529 plan, historical averages show a 10% annual return, compared to less than 2% from a savings account. Let’s illustrate this with a simple example:
- Starting amount: $10,000
- Savings account at 2%: After 10 years → ~$11,720 (after taxes)
- 529 plan investing in S&P 500 at 10%: After 10 years → ~$25,937
That’s more than double the growth—and that growth is completely tax-free if used for educational purposes.
See the Difference for Yourself: College Savings Calculator
How to Approach 529 Investing
Think of a 529 plan as you would your retirement account:
- Start early: Time is your biggest advantage because compounding works best over long periods.
- Invest in broad market index funds: Like an S&P 500 index fund, for long-term growth.
- Keep it consistent: Contribute regularly, even small amounts, to take advantage of dollar-cost averaging.
Bottom Line
While a traditional savings account is safe, it cannot compete with the tax-free growth and higher returns that a 529 plan offers. By using a 529 plan and investing wisely, you can significantly increase the amount available for college while avoiding taxes on earnings.
A 529 plan is more than just a savings account—it’s a smart, tax-advantaged investment vehicle that helps your money grow faster and go further.
If you live in North Carolina, you can explore the state’s 529 plan and get more information here. We already have some of the best value public schools anywhere in the world. If you pair UNC system tuition with a 529 savings plan, you will have a solid plan to pay for a great education. And if you or your child do not plan on going to college, there are other forms of education that the 529 can fund including trade programs and online skill programs.
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