529 prepaid tuition plans
are different from 529 savings plans: Instead of investing your money with the potential for your investment to gain or lose value, you purchase future tuition at today’s prices. Since tuition prices usually rise much faster than inflation, prepaid plans can be a good way of locking in education costs.
The plans are sponsored by individual states — though not every state offers one — and the credits you purchase are valid at most of the public schools in the state. Some plans may even guarantee your beneficiary admission to at least one participating school. A few private colleges also offer these plans, but the contract is only valid at the sponsoring institution.
You don’t owe federal income tax — and in many cases no state and local taxes — on the increase in value of your tuition benefit. Some states let you take a tax deduction on your contributions as well.
Change of plan
If you put money in a 529 prepaid plan but your beneficiary doesn’t end up at one of the participating schools, you might be able to transfer your credits to another school, depending on the plan. In some plans, you’ll face a transfer penalty or simply have your initial investment returned to you. Make sure you understand the plan’s refund policy before you invest.
Many prepaid plans
are guaranteed by the full faith and credit of the state
that administers them or by the sponsoring institution. Others
aren’t. If you’re considering a prepaid plan,
check the fine print and make sure the plan guarantees that
your investment will cover future education costs.
