Tax advantages include federal tax-deferred earnings and tax-free distributions from a 529 plan, as well as any state income tax deduction or tax credit for contributions to the state’s 529 plan.
A tax credit is a direct reduction in a tax liability. Some states have 529 tax credits.
A tax deduction is a reduction in taxable income. Some states have 529 tax deductions. (In New Mexico, 100% of contributions to your 529 account with The Education Plan are deductible from your New Mexico state taxable income each year.)
When taxes are deferred, they are paid at a future date instead of when the income or gain was originally earned. This can shift the taxes to a time when the taxpayer has a lower tax bracket or a situation when the tax liability is disregarded, such as a qualified distribution from a 529 plan.
A tax penalty is additional federal tax that serves as a disincentive for certain activities, such as non-qualified distributions from a 529 plan.
The total return on an investment is the percentage change in the investment’s net asset value, assuming that all dividends and capital gains distributions are reinvested.
A trust fund is a set of assets that are held by a trustee for the benefit of one or more beneficiaries.