What is a 529 Prepaid Plan?
The 529 prepaid plan is a type of Qualifying Tuition Program (QTP) that allows contributors to save for a single beneficiary’s future college expenses at a specific school through a state or institutional investment savings plan. The account is tax-advantaged meaning that earnings in the account are not subject to taxes as long as they are used for qualified educational expenses.
With a 529 prepaid plan, you can purchase tuition certificates that count toward the beneficiary’s tuition costs for up to five years of undergraduate education. The maximum contribution depends on limits set by the state, and may range from $200,000-$500,000. Each year the tuition rate rises an average of 3% as noted in the College Board’s Trends in College Pricing 2018 and 2017 research. Starting a 529 prepaid plan is a great way to save for college if you know the state or institution where the beneficiary will attend school.
How does a 529 Prepaid Plan Work?
When enrolling in a 529 prepaid plan, you decide how many years of tuition you want to prepay. You are then given a prepayment plan based on the number of years and the age of the beneficiary. Annual contributions within a specific period are converted to “tuition certificates” that can be used for one year of tuition at an eligible school.
Where Can I Use My 529 Prepaid Plan?
Both state and private prepaid plans partner with specific schools. Most state-sponsored plans also set residency requirements, limiting the plan to individuals residing in the state. The Texas Tuition Promise Fund limits the plan enrollment to individuals who reside in Texas.
The Private College 529 Plan partners with a network of 300 private schools, including Stanford, Princeton, Notre Dame, and the Claremont Colleges. Students who enroll in the plan are eligible to use their tuition certificate at any participating school.
What Happens to My 529 Plan if My Child doesn’t Go to College?
If you don’t go to college, there are options for your 529 prepaid plan. Some plans allow you to transfer money to different participating schools. As with 529 College Savings Plans, you can also change the beneficiary to an eligible family member. In some cases, you may request a refund, which is subject to specific program fees, in addition to a 10% penalty tax and income taxes based on the earnings portion.
Limitations of 529 Prepaid Plans
While 529 Prepaid Plans are ideal if you know the college you plan to attend, there are some restrictions compared to 529 College Savings Plans.
Limited Enrollment Periods and New Enrollment
Each plan typically has a limited enrollment period. Check with the plan to determine the enrollment period. For example, the Washington Guaranteed Education Tuition (GET) Program’s 2018-1019 enrollment period is November 1, 2018 - May 31, 2019. Some plans, such as the Virginia Prepaid 529 have delayed new enrollment.
Expenses Limited to Tuition and Undergraduate Education
Most prepaid plans are limited to distributions for tuition and mandatory college fees. Room and board, books, and other supplies are not eligible expenses. Some plans, such as the Texas Tuition Promise Refund, limit expenses to undergraduate education.
Age and Redemption Restrictions
Some 529 prepaid plans are limited to beneficiaries under the age of 18 and require plan funds to be used prior to the beneficiary’s 30th birthday. Also, the plan may require a minimum of three years or 36 months before the tuition certificate can be redeemed. In most cases, it’s not beneficial to invest in a 529 Prepaid Plan unless there are several years between when the plan is opened and when the beneficiary is expected to begin school.
Is a 529 Prepaid Plan Right for Me?
A 529 prepaid plan is ideal for a beneficiary who know which college they would like to attend or is flexible about attending a school where they can use the plan. If you are unsure or would like to pay for room and board and related college expenses, a 529 College Savings Plan may be a better fit. Compare 529 Prepaid Plans vs 529 College Savings Plans and discuss your concerns with a tax professional to determine the right plan for you.