Faithfully saving money for your child's higher education might be all for naught if you're stashing cash in a savings account.
College savings accounts, known as 529 plans, offer families a way to save on a tax-favored basis: Money you save here accumulates on a tax-free basis.
Account holders may tap their cash tax-free if they are using it to cover qualified higher-education expenses, including tuition, fees, books and room and board.
If you tap the money for any other purpose, you'll be on the hook for ordinary income taxes and a 10 percent penalty, said Lazetta Rainey Braxton, a certified financial planner and founder of Financial Fountains.
Despite the benefits of 529 plans, many families still turn to alternatives.
More than 4 out of 10 parents saving for their children's education are pouring their money into general savings accounts — making it the most commonly used account for accumulating college savings, according to research from Sallie Mae, a provider and servicer of student loans.
Nearly a quarter of all college savings in the U.S. is held in savings accounts, Sallie Mae found.