There are many methods that you can use to save money for your children’s future college education. One of the most alluring methods is the section 529 plan, or also known as Qualified Tuition Programs. According to FinAid, there are two basic types of section 529 plans: the prepaid tuition plan and the college savings plan. These plans get their name from section 529 of the internal revenue code, which states that these plans are exempt from federal income taxes. Here are the key differences between the two and they can be used to get the most out of your savings.
The 529 Prepaid Tuition Plan
The most enticing feature of the 529 prepaid tuition plan is that it has a set value that will increase with the cost of tuition. What this means is that if you have purchased a year’s worth of tuition at a state college, that value does not change even if tuition for that same amount of time later down the line ends up being more. This eases the nerves of parents who are concerned with how the state of the market in the future and how it will affect the cost of tuition.
These plans are conducted by state governments, “with the tuition guarantee based on an enrollment-weighted average of in-state public college tuition rates” according to FinAid’s article on Section 529 Plans. Keep in mind that these plans are great for those who want to attend college in the state they currently reside in. If your child ends up wanting to go out of state for college, the plans will usually pay the average of the in-state college tuition, leaving the parents to pay the difference.
Another added benefit of this plan is that anyone can contribute to it, such as grandparents and friends of the family. And in the unfortunate event that the child dies or on the other hand decided they do not want to go to college, he plan can be transferred to another family member. Overall, this plan allows one to hedge against a future economic downturn that may occur. However, unlike the 529 College Savings Plan, it does not have the potential to gain if the market ends up doing really well since it is not tied to the performance of the market.
The 529 College Savings Plan
In contrast to the 529 prepaid tuition plan, there is no lock on tuition at the current rates and there is no guarantee. The plans are higher risk because they are at the mercy of market conditions, which could be beneficial or detrimental to your savings plan. Though these plans do not offer the peace of mind for parents that the foremost plan offers, savvy investors or those who have experience with investing may take the risk for the potential to earn larger gains.
Typically, the investment strategy is broken into four to five age ranges. At a younger age, the investment is more aggressive. As your child gets older, the strategy gets more conservative. You can view these plans similarly to retirement plans, though contribution limits for these plans are much higher and their tax status is not as limited.
As mentioned before, anyone can contribute to the plan on the behalf of the beneficiary. However, it is important to note that the money is not controlled by the beneficiary but by the account owner. So, if anything happens to the child like if they decide not to go to college, they do not have access to the money. To determine what would happen in such an instance, make sure you review your plan’s terms before setting up the account. Furthermore, you should also be aware of any negative impacts that this could have on future financial aid for your child.