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What is a state-sponsored, college savings plan that offers tax-free earnings for education savings?

1) 401(k) plan
2) Roth IRA
3) 529 plan
4) Traditional IRA

1 Answer

5 votes

Final answer:

A 529 plan is the state-sponsored, college savings plan that offers tax-free earnings for educational savings, distinct from retirement plans such as 401(k)s and IRAs.

Step-by-step explanation:

A state-sponsored, college savings plan that offers tax-free earnings for education savings is a 529 plan. Unlike a 401(k) plan or an IRA, which are typically used for retirement savings, a 529 plan is designed specifically for education costs. With a 529 plan, contributions grow tax-free, and withdrawals are also tax-free when used for qualified education expenses. This differs from a 401(k) plan or Traditional IRA, where taxes on earnings are deferred until withdrawal, usually during retirement, and a Roth IRA allows for tax-free growth with specific contribution limits and withdrawal rules that benefit post-retirement income. States use these plans to encourage saving for education, which supports expenses like road repair and the broader category of education.

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