SIE practice questionmedium529 Plans — Tax Treatment
Contributions to a 529 plan are made with:
- APre-tax dollars, and withdrawals for qualified expenses are tax-free
- BAfter-tax dollars, and all withdrawals are taxed as ordinary income
- CAfter-tax dollars, but earnings grow tax-deferred and qualified withdrawals are tax-free at the federal level✓ Correct answer
- DPre-tax dollars, and all withdrawals are taxable
Explanation
Why C — After-tax dollars, but earnings grow tax-deferred and qualified withdrawals are tax-free at the federal level
529 contributions are made with after-tax dollars (no federal tax deduction, though some states offer state tax deductions). Earnings grow tax-deferred, and withdrawals for qualified education expenses are completely free of federal income tax. Many states also exempt qualified withdrawals from state tax. This makes 529 plans one of the most tax-efficient education savings tools.
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