Tags: Retirement | 529 plan | prepaid tuition | college savings

529 Plans: How Do a Prepaid Tuition Plan and a College Savings Plan Differ?

By    |   Tuesday, 28 Apr 2015 02:54 PM

Saving money to send your child or grandchild to college? The federal government offers two types of 529 plans: a college savings plan and a prepaid tuition plan. Both provide investment arrangements accompanied by tax breaks designed to encourage savings to pay for future higher education expenses of a designated beneficiary.

According to CSPN, withdrawals for qualified education expenses from the plans remain free from federal income tax. Here are some differences between the two types of plans.

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- Investing in the prepaid tuition plan is safer while the college savings plan offers more risk and potential reward. The holder of a prepaid tuition plan prepays all or part of a child's future tuition by investing in units or contracts and is guaranteed a minimum rate of return, though he or she isn't necessarily entitled to any extra money the plan may earn, according to AXA Equitable Financial Services, LLC.

The person investing in a college savings plan contributes to an individual investment account, in a particular investment portfolio. You reap the benefits if the portfolio performs well, but suffer the losses if it doesn't.

Most college savings plans choose more conservative investments as the beneficiary approaches college age.

- Most states guarantee the funds you put into a prepaid plan will keep pace with tuition. College savings plans offer no such guarantee.

- A prepaid tuition plan allows you to purchase college units or credits, and in some cases room and board, for future enrollment at a college or university that participates in the plan.

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College savings plans typically cover any "qualified higher education expenses," which often include tuition, room and board, fees and — unlike a prepaid tuition plan — required materials such as books and computers.

- A college savings plan lets you use the funds at any college in the United States or abroad that's accredited by the U.S. Department of Education, while funds in a prepaid tuition plan may typically be used only for undergraduate tuition at public colleges in your state.

- Generally, no time limit exists regarding when withdrawals from a college savings plan must be made, though tuition credits in a prepaid plan must generally be used by the time the beneficiary reaches age 30.

- While you can generally contribute to a college savings plan at any time, prepaid tuition plans typically have select open enrollment periods, which are the only times you may open an account or contribute money, according to AXA Equitable Financial Services.

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Saving money to send your child or grandchild to college? The federal government offers two types of 529 plans: a college savings plan and a prepaid tuition plan.
529 plan, prepaid tuition, college savings
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2015-54-28
Tuesday, 28 Apr 2015 02:54 PM
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