Section 529 Plans: State Prepaid Tuition Plans

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Section 529 Plans: State Prepaid Tuition Plans

Like college savings plans, prepaid tuition plans are also state-sponsored. These plans differ significantly from the other college savings options because they allow you to lock in the cost of college at today’s prices. They can be good options if you think your child will attend a state university. (In a state-sponsored program, your child needs to go to college in that state to get the maximum benefit of this program.)

The answers to some questions about state prepaid tuition plans:

• How much can I contribute to the plan? The amount you can contribute varies from plan to plan, and there are generally no income restrictions.
• What are the plan’s investment options? Prepaid tuition plans usually invest in state-backed bonds, because they aim only to keep up with rising in-state university costs.
• What are the taxes? Gains are tax-deferred and withdrawals are tax-free under the current tax code.
• Who controls the money? Unlike the other options here, you cannot control what the plan invests in. Although the account is technically in your child’s name, you retain control of it.
• Can the money in the plan be used for anything other than education? The money can be used for college funding only. If your child decides not to attend a state college, you can transfer the money to another child’s name.