We all grow up knowing that money saved is the money earned. When it comes to saving for the future, especially for education or other long-term plans, we look out for some comparative sources to make high profits. We have two most popular choices: 529 plans and high-yield savings accounts. Both have their merits and unique features, but understanding which suits your needs best can take time and effort. Beem offers high-yield savings accounts with up to 5% APY.
As per the data, approx 33% of families in the USA use savings accounts to help pay for their college education. In June 2022, there were 15.9 million 529 accounts in the USA, so it depends on us when choosing specifically for education with some tax benefits or some short-term savings. There are two plans you can avail of. To find out if a high-yield savings account aligns more with your needs than a 529 savings account, you should consider your financial objectives and risk tolerance.
In this blog, we will highlight the key differences between 529 plans and high-yield savings accounts. It will help you decide where to invest your hard-earned money.
Understanding 529 Plans and High-Yield Savings Accounts
529 Plans
A 529 plan is a tax-advantaged savings vehicle designed specifically for educational expenses. These plans come in two main forms: prepaid tuition and education savings. The former allows you to pay for future tuition at today’s rates.
At the same time, the latter enables you to invest in mutual funds and other investments to cover future education costs. Earnings in 529 plans grow tax-free when used for qualified educational expenses, making them a popular choice for parents and guardians planning for their children’s education.
Also Read: Index Funds vs Mutual Funds
High-Yield Savings Accounts
Conversely, a high-yield savings account is a traditional savings account with a twist – it offers a much higher interest rate than standard savings accounts. These accounts are low-risk, highly liquid, and are typically offered by online banks. They are a secure place to park your funds while earning a better return than what you’d get from a regular savings account.
Utilization of Higher Education Funding Based on Income Levels
- Wealthier families, on average, contributed significantly more to their children’s education through college savings plans.
- Families making over $150,000 per year used college savings plans to cover 15% of their children’s college expenses.
- Conversely, families with incomes below $35,000 could only cover 6% of their children’s college costs with college savings plans.
| Family Income | Average Contribution |
| Less Than $50,000 | $1,267 |
| $50,000-$100,000 | $1,939 |
| $100,000-$150,000 | $3,674 |
| $150,000+ | $5,518 |
Key Differences Between 529 Plans and High-Yield Savings Accounts
Now, let’s delve into the key differences between these two options through a comprehensive comparison table based on seven essential factors:
| Factor | 529 Plans | High-Yield Savings Accounts |
| Purpose | Education Expenses | General savings and liquidity |
| Tax Benefits | Tax-free growth and withdrawals for qualified education expenses | Interest income is taxable but may offer some tax benefits |
| Contribution Limits | Generally high limits, often in the hundreds of thousands | Varies by bank, typically lower limits |
| Investment Options | Limited to predefined portfolios or investment choices | Limited or no investment options, primarily cash-based |
| Flexibility in Usage | Primarily for education expenses | It can be used for any purpose |
| Accessibility | Restricted to educational expenses | Easily accessible for any financial need |
| Risk Level | Varies based on investment choices; moderate to high risk | Low to no risk, FDIC-insured |
When to Choose a 529 Plan
Education Savings Priority: If your primary financial goal is to save for educational expenses, particularly for yourself, your children, or other eligible family members, a 529 plan is a compelling choice.
Tax Advantages: Opt for a 529 plan to leverage its tax advantages. Contributions to these plans are often tax-deductible at the state level, and the earnings grow tax-free when used for qualified educational expenses.
Long-Term Investment: If you have a substantial time horizon before the funds will be needed for education, a 529 plan allows you to invest in potentially higher-returning assets, albeit with some degree of risk, which can maximize your savings over time.
Specific Educational Goals: 529 plans are designed for educational expenses, making them an ideal choice if you have well-defined educational goals, such as funding college or vocational school tuition.
State Tax Benefits: Many states offer additional tax incentives for contributing to their 529 plans. Choosing a plan from your state can provide extra financial advantages.
Grandparent Contributions: Grandparents looking to contribute to their grandchildren’s education can utilize 529 plans, often benefiting from state tax deductions and estate planning advantages.
Estate Planning: 529 plans can be valuable for estate planning, as they allow for substantial contributions while potentially reducing your taxable estate, an attractive option for those with significant assets.
Transferring Beneficiary: If the intended beneficiary decides not to pursue higher education, you can change the beneficiary to another eligible family member without incurring tax consequences.
Ultimately, choosing a 529 plan is a strategic decision that aligns with specific educational objectives and the desire to take advantage of tax benefits.
When to Choose a High-Yield Savings Account
General Savings: A high-yield savings account is an excellent choice if you are looking for versatile savings that can be used for various financial goals with no restrictions on usage.
Emergency Fund: It’s crucial to build an emergency fund. It helps in case of unexpected situations. A high-yield savings account is an ideal way to park these funds as it is always accessible and safe.
Short-Term Goals: If you have short-term financial goals such as saving for a vacation, home repairs, or a down payment on a house, a high-yield savings account ensures that your money remains easily accessible when needed.
Low Risk: High-yield savings accounts are virtually risk-free since they are typically FDIC-insured up to a certain limit, ensuring that your principal is safe even in turbulent financial times.
Higher Returns Than Traditional Savings: You can earn significantly more interest in a high-yield savings account than a regular savings account, allowing your money to work harder for you while maintaining the same level of security.
No Penalties for Non-Education Expenses: Unlike 529 plans, there are no penalties or restrictions on using funds from a high-yield savings account for non-educational expenses, providing greater financial flexibility.
Also Read: Index funds: The right way to invest
Shorter Time Horizons: When your financial goals have a shorter time horizon, and you don’t want to expose your funds to market fluctuations, a high-yield savings account offers a stable return.
Easy Accessibility: High-yield savings accounts are easily accessible through online banking platforms, making it convenient to manage your funds and withdraw when necessary.
In summary, a high-yield savings account is the right choice when prioritizing liquidity, accessibility, and safety for your savings. It’s particularly suitable for short-term goals, emergency funds, or situations where you want to maintain financial flexibility without the constraints associated with educational expenses tied to 529 plans. Choose what fills your need wisely.
See also about: 7 differences between savings and investments
Conclusion
Choosing between a 529 plan and a high-yield savings account depends on your financial goals, time horizon, and risk tolerance. 529 plans excel at providing tax advantages for educational expenses, while high-yield savings accounts offer flexibility, liquidity, and safety for a wide range of financial needs. Beem offers up to 5% APY on high-yield savings accounts. To make the best decision, consider your specific objectives and consult a financial advisor if necessary. Remember that a diversified financial strategy may involve both options to effectively achieve your short-term and long-term financial goals.
FAQs
Q. Is a 529 better than a high-yield savings?
A 529 plan is ideal for education savings, offering tax advantages, but it’s only sometimes better than a high-yield savings account for general needs. It depends on your financial goals; 529s are for education, while high-yield savings accounts offer flexibility.
Q. How do rich people use 529 plans?
Wealthy individuals use 529 plans to fund education tax-efficiently. They contribute generously, benefit from state tax breaks, and use 529s for estate planning to transfer wealth while reducing taxable estate.
Q. Is a 529 plan better than an investment account?
A 529 plan suits education savings with tax benefits, while an investment account offers flexibility. The choice depends on your objectives.
Q. Why not use 529 for college?
529s are designed for education expenses, offering tax perks. However, other options may be more suitable if you lack education expenses or prefer flexibility.
Q. What happens to 529 if the child dies?
If the beneficiary passes away, you can change beneficiaries, use funds for your education, or withdraw (taxes and penalties apply to earnings).
Q. Is a mutual fund better than a 529?
A mutual fund can be part of a 529 plan. They serve different purposes, such as how you structure investments and your goals.
Q. Is investing in a 529 plan smart?
Investing in a 529 is wise for education savings due to tax benefits. Assess your goals and state plan benefits.
Q. Is a 529 worth it for two years?
A 529 can benefit from a two-year education program, offering tax advantages and potential growth. Evaluate if it aligns with your short-term goals.
