Kornelija Kazlauskas 
Higher education is becoming increasingly expensive today, so parents need to start saving as early as possible. Two popular options for college savings are 529 plans and prepaid plans. This article will compare 529 vs. prepaid plans, their advantages and disadvantages, and help you choose the best option for your child’s future.
What Are 529 Plans?
529 plans are tax-advantaged savings plans that allow you to invest in your child’s future education expenses. These plans are named after Section 529 of the Internal Revenue Code and are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans: prepaid tuition plans and college savings plans.
What Are Prepaid Plans?
Prepaid plans are state-sponsored plans that allow you to pay for tuition and fees at eligible colleges and universities at today’s prices, locking in the cost of education for the future. These plans are available in some states and may be limited to in-state schools.
529 Vs. Prepaid Plans: Which Is Better?
Several factors must be considered when deciding between a 529 plan and a prepaid plan.
Tax Benefits
529 plans offer federal tax-free growth and tax-free withdrawals when used for qualified education expenses. Some states also offer tax deductions or credits for contributions to a 529 plan. On the other hand, prepaid plans may provide state tax benefits, but they do not offer federal tax benefits.
Investment Options
529 plans offer a range of investment options, including age-based portfolios that automatically adjust based on your child’s age and risk tolerance. On the other hand, prepaid plans typically offer only one investment option, which may be limited to in-state schools.
Restrictions on Use
529 plans can be used for qualified education expenses, including tuition, fees, room and board, and books, at eligible colleges and universities in any state. Prepaid plans, however, may be limited to in-state schools and may not cover room and board or other expenses.
Plan Fees and Expenses
529 plans may charge fees and expenses, including account maintenance, investment management, and enrollment fees. Prepaid plans may also charge fees, such as enrollment fees and administrative fees. Be sure to compare prices and expenses when choosing a plan.
Choosing Between A 529 Plan and A Prepaid Plan
When choosing between a 529 plan and a prepaid plan, consider your financial goals, your child’s college plans, and your state’s plans’ tax benefits and restrictions. If you are unsure which method is best for you, consult a financial advisor.
How Much Should You Save?
The amount you should save for college depends on several factors, including the cost of tuition, your child’s college plans, and the current age of your child. As a general rule, financial experts suggest saving at least one-third of the total cost of tuition for a four-year degree program. It’s essential to start saving as early as possible, as the longer your money grows, the more it will accumulate.
Tips For Maximizing Your College Savings
- Start early and save regularly: The earlier you keep, the more time your money has to grow. Even small contributions can add up over time.
- Take advantage of tax benefits: Contributions to a 529 plan may be tax-deductible in some states, and earnings grow tax-free.
- Consider an age-based investment option: Age-based portfolios automatically adjust to become more conservative as your child approaches college age.
- Avoid withdrawals for non-qualified expenses: Non-qualified withdrawals may result in taxes and penalties.
- Look for ways to increase your savings: You may be able to save more by contributing bonuses, tax refunds, or other windfalls to your college savings account.
Frequently Asked Questions
What is the difference between a 529 plan and a Coverdell ESA?
A Coverdell Education Savings Account (ESA) is a tax-advantaged savings account that can be used for qualified education expenses from kindergarten through college. A 529 plan is a state-sponsored savings plan that can be used for qualified education expenses at eligible colleges and universities.
Can I switch from a prepaid plan to a 529 plan?
In most cases, yes. However, there may be restrictions on how much you can transfer and when you can make the transfer. Check with your state’s plan administrator for specific rules and requirements.
What happens if my child doesn’t attend college?
If your child decides not to attend college, you can change the plan’s beneficiary to another family member or withdraw the funds. However, non-qualified withdrawals may result in taxes and penalties.
Can grandparents contribute to a 529 plan?
Yes, grandparents, family members, and friends can contribute to a 529 plan. However, there may be gift tax implications for contributions over a certain amount.
How do I withdraw money from a 529 plan?
To withdraw money from a 529 plan, you must provide proof of qualified education expenses, such as tuition, fees, room and board, and books. You can request a withdrawal online or by contacting your plan administrator.
Conclusion
Choosing between a 529 plan and a prepaid one can be challenging for parents. Both programs offer tax-advantaged savings options to help fund your child’s education. When deciding which plan to choose, consider your financial goals, your child’s college plans, and each plan’s tax benefits and restrictions. Remember to start saving early and regularly to maximize your college savings. You can help ensure your child’s future success with the right strategy and some planning.
