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Although there are various options, a 529 college savings plan gets high marks for its tax benefits and flexibility. And since it’s an investment, the sooner you start saving, the more you’ll have when you need it. There are two types of 529 plans: savings and prepaid tuition. Savings plans are available in most states, while the prepaid plans are less common.
The biggest benefits of these state- or school-operated ‘qualified tuition programs’ are:
These plans allow you to pay money now to lock in future college costs, but they are less widely available than the 529 savings plans. Depending on the type of prepaid plan, the money you pay usually allows you to cover in-state tuition costs, although some plans might cover other expenses as well. And most prepaid plans have age or grade limits for the beneficiary.
Since these plans are usually targeted at the schools offering them, make sure you check to see what your money-transfer options would be if your child or beneficiary chooses a different school to attend.
An advantage of this type of plan is that your payments lock in future college costs and the plan must make good on its promise.
Things to keep in mind:
There also are other considerations to be aware of.
If the money in the plan isn’t used for qualified education expenses, you face a 10% withdrawal penalty on the earnings (not the principal), and the withdrawn earnings will also be taxed at your regular income tax rate. However, if your child decides not to attend school, the person who controls the account could name another beneficiary for the money and it could be used for that new person’s qualified educational costs.
The money in a 529 account will have some effect on financial aid applications. Be sure to check with an advisor on how this is affected by federal or school rules.
As part of any financial planning, make sure to do your research on the options you have, and check with a trusted financial advisor on the various plans’ options and risk levels.