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With both 401k and Education saving Plans, all growth is tax-deferred. 

Proceeds from a Education Plan used to pay educational expenses are exempt from federal taxes. But 401k contributions are made in pre-tax dollars while Education Plans have to be funded with after-tax dollars.


Most parents will be in a better position to help their kids with college costs by maximizing their 401k and then taking a early withdrawal for their 401k plan to pay for Education expenses.
 

401(k) balances below high of six years ago

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Despite strong investment gains during the past three years, employees' 401(k) account balances, on average, are lower than they were six years ago as the accounts have yet to fully recover from the beating they took during the bear market for equities, according to a study.

Last year, the average 401(k) account balance for plan participants was $62,500, up 3.1% from the $60,600 average account balance in 2004 and a 13.6% increase from 2003, when account balances averaged $55,000, according to the study by Fidelity Investments, a Boston-based mutual fund provider and 401(k) plan administrator.

Last year's average, though, was slightly below the $64,000 average account balance in 1999-the peak of the bull equities market.

The study-which was based on an analysis of account balances of more than 9 million participants in nearly 12,000 corporate plans serviced by Fidelity-also found that employees who are automatically enrolled by their employers in 401(k) plans are ``very likely'' to stay in the plans and not opt out.

For example, of the nearly 100,000 employees automatically enrolled in a 401(k) plan last year, 87% remained in the plan throughout the year and 18% increased their deferral rates.

Pension legislation signed last week by President Bush makes it easier for employers to establish such automatic enrollment programs.

A summary of the findings from the study, ``Building Futures,'' is available at www.fidelity.com.


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