Prepaid Tuition Plans Vs College Savings Plans
As you now know there are two primary types of 529 plans available, the prepaid tuition plan and the college savings plan. If you are not clear what a 529 plan is then read our detailed overview of 529 college savings plans. This will help you get familiar with savings plans. Back to the differences. There are differences between the way each state implements their specific 529 plan program. This will serve as an overall guide to the general differences between the two types of 529 plans. We will first take a look at the prepaid tuition plan and then the savings plan.
The 529 prepaid tuition plan is normally administered by the state where the beneficiary holds residency. Each state has their own specific rules as to the deductibility of contributions from state taxes and the taxable nature of subsequent withdrawals. These prepaid tuition programs allow the donor to lock in current tuition fees, in current dollars, and the plan will guarantee that the tuition will be paid no matter what the rate may be in the future. These plans offer maximum security for those using them because they are a guarantee that the beneficiary’s education will be paid in full, whereas the 529 savings plan has no such guarantee. This is a great option for those that want safety and security, but somewhat limits the beneficiary to attending a state school. There are some states that will allow you to move the money to another state school in another state, but you need to check with your state to determine the specific program rules.
The prepaid tuition plans normally cover tuition and fees only. There are a few states that allow for other expenses such as housing. Most of these prepaid plans put the donor on a payment plan based on the selected beneficiary’s age and how many units the plan is being designed to cover. Most of these plans are not only administered by the states, they are also guaranteed by the state. There are other restrictions on these plans such as residency, age, and current grade level of the beneficiary. Check with your state to determine their specific program outline.
The 529 Savings plan on the other hand is much more flexible. But along with this flexibility you lose the guarantee of current year tuition rates and you lose the guarantee of the investment by the state. The investment options in these plans is much more flexible than a prepaid plan and includes stocks, mutual funds, and other allowable investment instruments.
While there is no guarantee of the tuition cost or investment security, there are several primary differences between the savings plan and the prepaid plan. For example, the savings plan distributions can automatically be used for expenses other than tuition such as housing, books, computers, and even transportation. These plans do not have any age limit and you can even have a beneficiary of any age. The plans can also be purchased regardless of residency and they are more easily switched between beneficiary’s. These plans do not limit the beneficiary to a state run school either, the beneficiary is free to attend any school that is allowed under the IRS 529 code. The last difference is that their is no minimum contribution to this type of plan and can it can be started with as little as $25.
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