Every dollar saved may benefit from compounded growth, giving the account the potential to grow faster and further reducing your reliance on loans. Money in a 529 college savings plan has tax advantages, is professionally managed, and may benefit from the power of compounded growth. Compounding works like this: any income earned on your investments in the account has the potential to generate additional income in the next year and each year thereafter. Earnings are automatically reinvested and help the account grow faster.

The Benefits of Tax-free Growth

This hypothetical example shows why a 529 college savings plan may be a smart choice for families preparing for a child’s college education. Assuming a 5% annual rate of return, a parent who saves just $25 a month — that’s $300 a year — in a 529 college savings plan could see their child’s account grow to $315 at the end of the first year. While that may not sound like much, compounded growth helps even modest returns add up, especially over longer periods of time. If the same parent continues to save $25 a month in a 529 plan for 18 years, he or she will have put $5,400 into the account. Assuming the same rate of return as above, compounded every year, the account could grow by 64% and be worth $8,730. The extra $3,330 is the benefit of compounded growth at work.

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