Susan E. Thomas CPA
What's the difference between a 529 savings plan and prepaid tuition plan?

529 savings plans are more popular than 529 prepaid tuition plans because they are broader in scope and more flexible. Most every state offers at least one 529 savings plan, but only a handful of states offer a prepaid tuition plan. Generally, you can join any state's savings plan, but you can only join your own state's prepaid tuition plan. The type of plan you choose will depend primarily on the type of college you think the beneficiary might attend.

A prepaid tuition plan allows you to prepay tuition at in-state public colleges. By purchasing a certain number of credits or units in the plan today, you are essentially guaranteed that your payment today will cover a certain amount of tuition in the future, no matter how much costs go up between now and then. In effect, you are getting a guaranteed minimum rate of return. However, to receive the maximum benefits under a prepaid tuition plan, your child must attend an in-state public college in that plan. If your child chooses a different school, you may pay a penalty. Check the rules of your state's prepaid plan.

By contrast, a savings plan doesn't restrict the beneficiary's choice of college. Funds in a savings plan account can be used for the full cost (tuition, fees, books, and, if the student attends at least half-time, room and board) at any college or graduate school in the country or abroad that is accredited by the U.S. Department of Education. This provides maximum flexibility on choice of college. But there is no guaranteed minimum rate of return. When you contribute to a 529 savings plan, your money goes into one ore more of the plan's investment portfolios, and you either gain or lose money depending on how your investment options perform.

If you're a fairly conservative investor and believe that your child will choose from among a number of public colleges located in your home state, then a prepaid tuition plan may be the appropriate choice (assuming your state offers one). But if you don't want to restrict your child's college options or you believe that you can earn a better rate of return than what is promised by a prepaid tuition plan, then a savings plan that offers a range of investment options may be the right choice.

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011