[VIDEO] What is a qualified expense?

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What's the big deal about 529 plans, anyway? Can't I just use my regular savings account, mutual fund or Roth IRA to save for college? I don't want to use a 529 plan because I'll lose everything if my child doesn't go to college.

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These are all common questions we hear from families. The truth is, you can use any method to save for college, but we think a 529 plan is the best way. 529 plans are investment vehicles that offer tax incentives for families saving for college. Earnings in the account will grow tax-free and will not be taxed when the funds are withdrawn to pay for college. Now, if you end up spending your 529 money on something other than higher education expenses, you will have taken a non-qualified withdrawal and you will lose your tax benefits. Specifically, the earnings portion of the withdrawal will incur income tax as well as a 10% penalty.

The principal portion of the withdrawal, which is made up of your after-tax contributions, will never be taxed or penalized.

Fortunately, with a few exceptions, many college-related expenses are considered qualified. And if you're worried that your child won't go to college you can always change the beneficiary to a sibling or other qualifying family member who will (including yourself). There are also exceptions to the penalty if the beneficiary dies, becomes disabled, earns a scholarship or attends a U.S. Military Academy.

For those who are headed to college, check out the following video to see some common purchases that will be considered qualified.

Top 5 ways to spend 529 plan money