Tuesday is National 529 College Savings Plan Day, even though many families are not likely to celebrate.
That's because only 29 percent of Americans even know that 529 plans are an education savings tool, according to a new survey by the investment firm Edward Jones. That's down from last year, when 32 percent of the more than 1,000 people polled said they understood the purpose of these state-sponsored plans.
The plans offer many tax benefits that are better than using a bank savings account.
For instance, not only can you get a tax deduction or credit for contributions (more than 30 states and the District of Columbia offer a direct state tax deduction for your contributions), earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses, such as tuition, fees, books and room and board.
The new tax law even expanded the use of plans to include private-school tuition from elementary through high school. Families now have the option to use up to $10,000 in annual tax-free 529 plan withdrawals to cover those early educational expenses. (While this addition sounds like a good idea, making early withdrawals could forfeit the benefit from long-term compounding.)
In 2017, the average account size jumped to a record high of $24,057, up 13 percent from the year earlier, according to the College Savings Plans Network.
Total investments in 529s also reached a record $319.1 billion last year, 16 percent higher than 2016 (see the chart below from the College Savings Plans Network).