When states first rolled out 529 savings plans, they did not offer tax-free withdrawals. Back then the 529 plan’s tax protection vanished when the money was pulled out. To encourage residents to contribute to these new-fangled college savings accounts, states trotted out the tax deduction.
But years ago, Congress waved its magic wand and transformed a respectable 529 college savings account into a prince of a deal. Thanks to the federal government, parents no longer had to pay federal taxes when they drained their accounts for college.
Let me ask you this: what other type of investment account lets you capture a tax break on the front end and avoid taxes from the IRS on the back end too?
That’s certainly a fair question.