One way to save for college long-term for your kids is through a 529 plan, or qualified tuition plan. There are two types of qualified tuition plans: pre-paid tuition plans and college savings plans.
Qualified tuition plans, according to the U.S. Securities and Exchange Commission are sponsored by states, state agencies, or educational institutions. They are 529 plans, named for the IRS code under which they are authorized.
College savings plans allow a saver, or account holder, to establish an account for the student, or beneficiary, for the sole purpose of covering college expenses. Several investment options are available, such as mutual funds, money-market funds, and age-based portfolios.
There are several major differences between college savings plans and pre-paid tuition plans.
- Whereas pre-paid tuition plans lock in tuition rates at eligible schools, college savings plans don’t.
- While pre-paid tuition plans cover only tuition and mandatory fees, college savings plans can cover expenses including room and board and required books and other materials.
- Many states with pre-paid tuition plans guarantee funds in a pre-paid tuition plan. There is no state guarantee on college savings plans, and it is possible to lose money in such accounts due to risky investments.
- Whereas many pre-paid tuition plans have age and residency requirements for beneficiaries, college savings plans are open to adults and children and have no residency requirements.
- While many pre-paid tuition plans have limited enrollment periods, enrollment in college savings plans is open all year.
Investments in 529 plans aren’t subject to federal tax and in many cases are untaxed by the state as well. Consumers could pay broker fees, maintenance fees, and enrollment charges on 529 accounts.