Home / Articles / Prepaid tuition vs. college savings: Which type of 529 plan is better?

Prepaid tuition vs. college savings: Which type of 529 plan is better?

September 21, 2016

Share:

Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:

•    Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred.
•    Some states offer tax incentives for contributing in the form of deductions or credits.
•    The plans usually offer high contribution limits, and there are no income limits for contributing.

Prepaid tuition plans
With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.

Savings plan
This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.

But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.

As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.

© 2016

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

Guidance

Related Articles

Article

2 Min Read

IT Audit Guide for Ohio Sports Gaming: Rule 3775-16-2

Article

2 Min Read

Social Security’s Future: The Problem and the Proposals

Article

2 Min Read

Strengthening Cybersecurity for Financial Data Protection

Article

2 Min Read

Fair Lending Compliance: What You Need to Know

Article

2 Min Read

Review Your Security Status With Our CMMC Readiness Checklist

Article

2 Min Read

Is a CFO the Right Choice for Your Nonprofit?

Get in Touch.

What service are you looking for? We'll match you with an experienced advisor, who will help you find an effective and sustainable solution.

  • Hidden
  • This field is for validation purposes and should be left unchanged.