An Understanding of 529 Plans
A 529 college savings plan or program is a college funding vehicle that has federal tax advantages. There are two types of 529 plans; college funding/savings plans and prepaid tuition plans. Although college funding plans and prepaid tuition plans share the same federal tax advantages, there are important differences between them that you should understand.
Section 529 College Savings Plans let you save money for college in an individual investment account. These plans are run by the states, which typically designate an experienced financial institution to manage their plan. To open an account, you fill out an application, choose a beneficiary, and start contributing money. Typically, you choose one or more portfolios offered by the plan, the underlying investments of which are chosen and managed by the plan’s professional money manager. After this, you simply decide when, and how much, to contribute.
Section 529 Prepaid Tuition Plans, on the other hand, help you save differently. Prepaid tuition plans may be sponsored by states (on behalf of public universities) or by private colleges. A prepaid tuition plan lets you prepay tuition expenses now for use in the future. The plan’s money manager pools your contributions with those from other investors into one general fund. The fund assets are then invested to meet the plan’s future obligations. Many plans even guarantee a minimum rate of return. These plans have different criteria for determining how much they’ll pay out in the future. And if your beneficiary ends up choosing to attend a school that isn’t in the prepaid plan, you’ll typically receive a lesser amount according to a predetermined formula.
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