Tax-deferred College Savings Plan

"Tax-deferred College Savings Plan" submitted by SchoolGrantsfor Editorial Team and last updated on Monday 9th January 2012

Table of Contents

Tax-Deferred Accounts in which taxes are not paid on investment growth or earnings until funds are withdrawn from the account, such as a Qualified Retirement Plan. Deferred tax assets represent taxes that have been paid (or often the carryforward of losses) but which have not yet flowed through the income statement. A deferred tax liability represents tax payments that have appeared on the income statement but not yet been paid. They usually arise when accounting standards and tax authorities recognize the timing of taxes due at different times.

Deferred tax is an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.

The term tax deferred refers to the postponement of paying taxes on earnings until a later date. In an investment situation, money allowed to grow in a tax deferred account is not taxed until it is withdrawn. Some examples of tax deferred investments are individual retirement accounts (IRAs), annuities, and certain types of bonds.

Tax-deferred College Savings Plan

A tax-deferred savings plan is usually an account that is associated with a person’s retirement savings, such as a 401(k) plan or an IRA. Tax deferred plans are also available for other purposes, including education savings plans. These plans work by deferring any taxable income accumulated in the account until a particular date or until the money is withdrawn, depending on the details of the account.

Tax-deferred investments can provide investors with valuable savings. Essentially, tax-deferred investments allow investors to save money in the present, dealing with taxes in the future. To take advantage of tax deferred savings, an investor can choose to place pre-tax dollars, up to a certain amount, in various investment products. By doing so, the investor lowers his or her current taxable income and may be able to benefit from taxation at a lower tax bracket.

Deferred tax savings plan or account that is registered with the government and provides deferral of tax obligations. Tax-deferred savings plans may defer taxable income earned within the account either until withdrawal or until a particular date. Saving in taxable accounts will give you more freedom, since you won't have to deal with the restrictions that come with tax-deferred accounts.

Coverdells or 529 plans allow you to set aside money that can grow tax-deferred and that's entirely tax free if used for qualified education expenses. You can contribute $2,000 a year to a Coverdell through 2010, when the annual contribution drops to only $500. In contrast, 529 plans typically have much higher limits (a total of more than $300,000 in many states).

Coverdell ESA tax-deferred savings account used to fund qualified higher education expenses and Tax-deferred growth; withdrawals are free of federal income taxes if used for qualified elementary, secondary, or post-secondary educational expenses; state tax advantages vary.

Tax-deferral can have a dramatic affect on the growth of an investment. With a state-sponsored 529 College Savings Plan your contributions can grow tax-deferred (some states allow contributions to be partially or completely deductible) and distributed income tax-free as long as distributions are used for qualified education expenses such as tuition, fees, room and board at higher education institutions.

529 Plans state-sponsored investing plan with tax-deferred growth and tax-free withdrawals and Tax-deferred growth; distributions are federal tax-free if used for qualified education expenses by a student enrolled at least part time at qualified institution; state tax advantages vary.

They are used most commonly in retirement savings accounts such as IRAs, 401(k)s and RRSPs, but are also available for education savings plans and other accounts. Essentially, tax-deferred savings plans allow you to use the taxes which would have gone to the government for investing. In the end, the taxes are paid, but not before the funds were used to make more money. And unlike other types of tax-deferred plans, such as 401K plans, IRS rules allow only a single exchange/reallocation of assets per year, in a 529 plan.

To determine the deferred tax treatment under various circumstances:

Tax-deferred Education Plan (SM) By SSgA

The Education Plan(SM), an innovative tax-deferred plan operating under IRC 529 which is a college savings program that enables investors from all income levels to save for higher education expenses. The Education Plan(SM) is the only 529 college savings program to offer a multi-manager investment approach.

The Education Plan(SM) enables investors to open an account with a minimum of $250 (or $25/month) and contribute up to $160,539 (adjusted annually) per beneficiary over the life of the account. Other college savings plans, such as an Education IRA, only allow investors to contribute $500 per year until a child (or grandchild) reaches 18 years of age. There are no Adjusted Gross Income (AGI) limits on contributions to The Education Plan(SM), therefore any investor can contribute regardless of their income level. Funds saved may be used to pay expenses associated with higher education including tuition, fees, room, board, books and supplies for the designated beneficiary.

The Education Plan(SM) offers many income, gift, and estate tax advantages that can help investors reduce taxes including:

State Street Global Advisors (SSgA), one of the world's leading institutional money management firms, is setting the asset allocation strategy and managing the plan's investment portfolios. The Education Plan(SM) is a product of Schoolhouse Capital, LLC, a subsidiary of State Street Corporation. For more information, visit SSgA's web site at or College Savings Center at

Tax-Deferred Annuity

403(b) tax-deferred annuity retirement program issued through ING. This program allows you to invest a portion of your earnings on a pre-tax basis. You decide how much of your income you want to invest, and you pay no current federal or state income taxes on the money you contribute, or any of its earnings until you withdraw it. Withdrawals prior to age 59-1/2 may be subject to a 10% federal penalty tax.


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