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Comparing a 529 Prepaid Tuition Plan and a 529 College Savings Plan?

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529 plans, collectively referred to by the IRS as Qualified Tuition Programs (QTPs), allow families to set aside money to pay for their child’s education. Each state decides which programs to offer, including restrictions and benefits. Institutions can also offer 529 Prepaid Plans. While 529 Prepaid Plans lock in tuition rates at specific schools, 529 College Savings Plans are investment accounts that can be used to pay for educational expenses at any eligible school.


529 College Savings Plan

The 529 College Savings Plan is the more popular option between the two programs. The program operates as an investment account using mutual and money market funds to accrue earnings on parental contributions. Each state sets the requirements for these programs, which are minimal. There is no age requirement—a 529 plan can be opened for any individual as long as they have a social security number (even a newborn). You can even open a 529 plan and name yourself as beneficiary.


Maximum contribution amounts for college savings plans are usually between $200,000 - $500,000 and designed to allow parents to save for the full cost of their child’s undergraduate and graduate educations. While there are no caps on the amount you can give other than the lifetime contribution maximum, your contributions are subject to the IRS gift tax if they exceed the annual gift limit of $15,000 per individual or $30,000 per couple (spouses must donate funds individually at $15,000 each).


Because 529 College Savings Plans are investment accounts, they do come with some risks. Unlike 529 Prepaid Plans, which are guaranteed by the state (more on this below), 529 College Savings Plans have no guarantees. Most accounts use an age-based investment model, in which investments are more conservative as the beneficiary reaches college age.


529 Prepaid Plans

529 Prepaid Plans are less popular overall, but a good option for families who know that the beneficiary will attend a participating school. Like 529 College Savings Plans, the 529 Prepaid Plan is also an investment account. Instead of saving for general higher education expenses, the plan allows you to lock in current tuition rates and pay tuition now for a school your child will attend in the future. These are usually in-state schools, though you may find similar opportunities for some private colleges. For example, the Private College 529 Plan was created for this purpose. 529 Prepaid Plans are only used to pay for tuition, unlike 529 College Savings Plans, which can also be used for other qualifying expenses.


At the beginning of the program, you choose how many years you want to pay for now, and you receive a payment plan to cover the costs based on the years of tuition you purchased and the age of the beneficiary (which dictates how many years in the future they’ll be attending college). Because age is factored into the payment plan, many 529 Prepaid Plans have age limits. Also, 529 Prepaid Plans usually limit participants to in-state residents. To obtain a 529 Prepaid Plan, you can only enroll during the specified enrollment period.


Despite the restrictions, a 529 Prepaid Plan is a good option for you if you are sure you plan to attend a participating school. If the beneficiary chooses not to attend college or chooses a different college, you will not necessarily lose your money. Some plans allow you to transfer your money to a different school. Also, you can change the beneficiary to a younger sibling or eligible relative that may attend that school. You can even get a refund, though you may have to pay some fees.


Because college tuition rates are increasing for public and private schools at a rate of at least 3% annually, choosing a 529 Prepaid Plan may be a better option than a 529 College Savings Plan as it guarantees you’ll pay no more than a set amount for college.


Differences Between 529 College Savings Plans and 529 Prepaid Plans


 

529 College Savings

529 Prepaid

Age Requirement

No

Some plans

Guarantee of future value

Standard investment risk

Guaranteed by state

Qualified Expenses (what it can be used for)

Tuition, Books, Computers and Laptops, Printers, Internet, Room and Board, Required Equipment

Tuition

Residency Requirement

Some plans

Most plans

Enrollment Period

No

Some plans

Payment Structure

Contribute up to the lifetime maximum set by plan, typically $200,000-$500,000

Set payments based on beneficiary age and number of credits purchased


How do I Choose Between a 529 College Savings Plan and 529 Prepaid Plan?

The decision of which program to choose may not be as hard as you think. The first thing to consider is where the beneficiary will go to school, in what state that school resides, and if you are a resident of that state. Some states do not offer 529 Prepaid Plans, and those that do typically limit prepaid plans to residents.


Prepaid plans are common among families with a strong history at one school or parents who are sure one of their children will attend school in state. If you’re opening an account for a newborn or a child that is too young or undecided about where to attend college, a 529 College Savings Plan may be a better option.

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