Comparing a 529 Prepaid Tuition Plan and a 529 College Savings Plan

A 529 plan is a great way to save for college. Here, we outline the differences between the prepaid tuition plan and the college savings plan.

October 5, 2021

Comparing a 529 Prepaid Tuition Plan and a 529 College Savings Plan

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A 529 plan helps families save for college, offering several ways to save money. With a college savings plan, savers make contributions that grow tax free. A prepaid tuition plan lets savers pay today's tuition rates for future college students. Many families wonder which plan they should choose.

Both 529 plan types offer advantages. A college savings plan also covers non-tuition costs. A prepaid tuition plan locks in lower tuition rates. Our guide compares a college savings 529 vs. a prepaid tuition plan to help savers decide.

What is a 529 Prepaid Plan?

A 529 prepaid tuition plan lets savers pay for college credits at today's rates. The credits then pay for future college tuition, often with a 10-year limit to spend them. Some states offer prepaid tuition plans that cover in-state tuition at their public schools.

Savers can withdraw the money to pay for tuition at another school. If the beneficiary chooses not to go to college, account holders will receive their contributions. However, they may need to pay a cancellation fee and a penalty on the withdrawal.

What is a 529 College Savings Plan?

A college savings plan works like a retirement account. Savers make contributions to the account and choose an investment option. Many plans let account holders pick stock or bond portfolios. Many also offer age-based portfolios with the target date set at when the beneficiary will attend college.

Savers can open a 529 plan through an investment management company or a state 529 plan. Account holders do not need state residency to use a state's 529 plan. After making contributions, account holders can withdraw the money to use at any school, including vocational and technical schools.

College Savings Plan vs. Prepaid Tuition Plan

Families choosing between a college savings 529 vs. prepaid tuition plan should weigh the benefits and conditions with each option. Prepaid tuition plans let savers lock in today's rates, but may require using the credits within 10 years. A college savings plan depends on market investments and their growth, which means taking on more risk.

Most savers choose a college savings plan. Currently, only nine states offer prepaid tuition plans. The plans only cover tuition and fees, vs. the broader coverage of a college savings plan. The following chart compares college savings 529 vs. prepaid tuition plans.

529 Plan Comparison Chart

College Savings Plan

  • Eligibility: College savings plans generally do not set an age requirement. Savers must list a Social Security number (SSN) for the beneficiary. New parents can open 529 plans for their child before receiving a SSN then name them as beneficiary later. These plans also do not come with residency requirements.
  • Coverage: College savings plans cover all qualified educational expenses, including tuition, living expenses, and textbooks. Contributors can also use a college savings plan to pay for K-12 tuition. Savers can change the account beneficiary to pay for any qualifying educational expenses, including vocational or technical school.
  • Tax Benefits: The federal government lets 529 investments grow tax free. When people make a withdrawal for a qualified educational expense, they do not pay income tax on the money. However, money withdrawn for non-qualified expenses comes with tax implications and a 10% penalty.
  • Contributions: Federal law caps the total contribution per beneficiary at five years of college tuition and living expenses. In practice, savers can contribute $250,000-$500,000 per beneficiary depending on their state. Contributors can put up to $15,000 in a beneficiary's account annually without triggering gift tax laws.
  • Withdrawals: Savers can make withdrawals from their 529 plan to pay for qualified educational expenses. They must pay federal income tax plus a 10% penalty on withdrawals for non-education expenses. Savers can reimburse themselves for educational expenses. For reimbursement purposes, account holders must also track withdrawals by calendar year, not academic year.
  • Plan Usage: Account holders can use their 529 college savings plan indefinitely. They can change the plan beneficiary to a child, a grandchild, or any other postsecondary students. Account holders can also use the plan to pay for their own education expenses.

Prepaid Tuition Plan

  • Eligibility: Prepaid tuition plans often come with residency requirements. In some states, contributors may lose their prepaid tuition if they move out of state. The plans may also come with age restrictions. Savers can also open a private college 529 to prepay tuition at one of 300 private colleges.
  • Coverage: Currently, only nine states offer prepaid tuition plans. Most prepaid tuition plans only cover tuition costs. They do not typically include room and board, textbooks, or other college costs. As a result, savers may want to set aside additional money for these expenses.
  • Tax Benefits: Like other 529 plans, the prepaid tuition plans offer federal tax advantages. Savers pay for tuition with pre-tax money, and do not need to pay taxes on the investment's increase. Some plans also offer state tax benefits, including state tax deductions on contributions.
  • Contributions Each prepaid tuition plan sets a maximum contribution, often equal to five years of tuition. Some plans let savers prepay for graduate tuition. Like other 529 plans, contributors must follow gift tax laws, capping annual contributions at $15,000 for non-dependents.
  • Withdrawals: Prepaid tuition plans allow withdrawals to pay for tuition at qualifying schools. Account holders can withdraw an amount equal to tuition at state colleges to pay tuition at another school. Savers who withdraw money for other uses must pay federal income tax plus a 10% penalty on the earnings. Account holders must report non-qualifying withdrawals on their tax return.
  • Plan Usage Prepaid tuition plans typically come with a time limit. Sometimes, account holders must use the prepaid tuition within 10 years or lose the interest on their initial contributions. This limits the ability to change beneficiaries or use a prepaid tuition account for an extended period of time.

Choosing Between a 529 Prepaid Plan and 529 College Savings Plan

College savings 529 vs. prepaid tuition plans both offer tax-advantaged ways to save for college. However, a college savings plan offers more flexibility for most families. Prepaid tuition credits require spending within 10 years, while college savings plans let savers use the money for longer periods. College savings plans also offer more flexibility in covered educational expenses.

As tuition rises, some families prefer locking in today's tuition rates in a prepaid tuition plan. Future students planning to attend an in-state public school may also prefer a prepaid tuition plan. Finally, savers can choose to open both types of plans.

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