Which is a tax-free savings account that can only used for educational expenses?
(a) Federal grants
(b) Needs-based grants
(c) A 529 plan
(d) Merit-based scholarships
Answer:
The tax-free savings account that can only be used for educational expenses is a 529 plan. Here’s why:
1. 529 Plan: This is a specialized savings account designed to help families save and invest for future education costs. The funds in a 529 plan can be used for qualified education expenses such as tuition, fees, books, supplies, and certain room and board costs at eligible educational institutions. One of the key benefits of a 529 plan is that any earnings grow tax-deferred and withdrawals for qualified education expenses are tax-free.
So, out of the options provided, a 529 plan is specifically tailored for educational expenses, making it the tax-free savings account that fits the description in the question.
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