What are the differences between 529 plans?

Answer:

There are two types of 529 plans, a prepaid tuition plan and a savings plan. Deciding between a savings plan and a prepaid tuition plan is an important first step. 

529 Prepaid Tuition Plan: Prepaid tuition plans allow families to pay tuition ahead of time for specific colleges or college systems at today’s tuition rates. Not every state offers a prepaid tuition plan. You can check with your state to see if it offers a prepaid tuition plan. 

Most state prepaid tuition plans require you or the student beneficiary to be a resident of the state offering the plan. The cost of the plan depends on the age and grade level of the student beneficiary when you purchase the plan. Some states also have age or grade limits for beneficiaries at the time of enrollment. 

You can make payments into a prepaid tuition plan account many different ways. For example, you can make payments:

  • In a lump sum, upfront payment;
  • On a five-year payment plan; or 
  • In fixed monthly payments.

529 Savings plan: 529 savings plans allow you to invest your college savings in various types of mutual funds and exchange-traded fund portfolios. These savings plans operate like a 401k or IRA retirement plan, your account could go up or down depending on market performance. There are two different types of 529 savings plans you can enroll in: 

  • A direct-sold 529 savings plan is 529 savings plan that is sold directly by a state, financial institution.  If you enroll in a direct-sold 529 savings plan, you are responsible for managing your own investments through their plan’s online account portal. 
  • An advisor-sold 529 savings plan is a 529 savings plan that is sold through an investment firm. For these plans, you typically pay a fee for the firm’s financial advisers to manage the plan’s investments. 

When evaluating which plan may work best for your family’s needs, take a close look at the plans’ fees,  investment options, contribution options, and withdrawal restrictions because they can vary a great deal. Also consider any tax advantages you may receive. 

Sifting through investment materials can feel overwhelming. Take your time, do research, compare plans, look at fee schedules, and ask plan administrators questions before you select a 529 plan for your family. 

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