Consider 529 Plans

Qualified tuition programs: Investigate savings plans that will help you prepare for future education costs.

Qualified Tuition Programs (QTPs) are commonly referred to as "529 plans," after the section of the IRS code that provides the plan's special tax breaks. A "529 plan" helps families and individuals prepare for the future costs of a college education.

There are two types of 529 plans: prepaid tuition plans and college savings plans.

  • Prepaid tuition plans
    A parent, grandparent, friend, or business (actually any person) saves money to pay future in-state tuition and required fees at any public college or university at today's prices.
  • College savings plans
    A participant uses his or her plan funds for college expenses at most accredited postsecondary institutions.

    Some states offer one plan or the other, while other states offer both plans. (Some plans allow participants to use funds for accredited vocation and international colleges.)

Prepaid tuition plans

As the name implies, a prepaid tuition plan allows residents a way to "lock in" future tuition and required fees at today's prices. Contributions made now purchase a certain amount of tuition and required fees at a later date at a specified list of schools. Plans in some states allow participants to transfer the value of their prepaid contract to private and out-of-state schools.

Below are just a few of the advantages and disadvantages of prepaid tuition plans:


  • The state guarantees the value of the investment to meet or exceed annual in-state public college tuition.
  • The program has little risk for the participant.
  • Taxes are deferred until earnings are withdrawn.
  • Earnings are taxed to the designated beneficiary rather than the account owner to the extent that the withdrawal is used to pay for qualified higher education expenses.
  • Contributions may qualify for gift tax exclusion.


  • The plans are limited to state residents.
  • If the beneficiary decides to attend a private or out-of-state college or university, the plan may not cover all tuition and fees.
  • If a contract is terminated, refunds of earnings are subject to penalties and other applicable fees.
  • Plan distributions are considered financial resources that reduce the beneficiary's overall financial need for the purposes of financial aid packaging.
  • Generally, plan funds are only applied to tuition and fees. However, some plans do allow funds to be used for other expenses such as room and board, course fees, and books.

College savings plans

College savings plans let parents use their plan funds for college expenses at any college.

Below are just a few of the advantages and disadvantages of college savings plans:


  • Investments grow tax free for as long as money stays in the plan. Distributions made between 2002 and 2010 will be tax free. After 2010, qualifying distributions will be taxable to the beneficiary unless Congress extends this tax break.
  • Plan assets are professionally managed either by the state treasurer's office or by an outside investment company appointed as the program manager. The benefactor can switch investment options within the same plan once per year or roll over one 529 plan into another once per year.
  • The benefactor has sole responsibility for the 529 plan. He or she decides when withdrawals are to be made and for what purpose.
  • The beneficiary can attend any accredited college in the United States and many institutions abroad.
  • Benefactors can change beneficiaries as often as they like, provided that the subsequent beneficiary is directly related to the original beneficiary.
  • Contribution limits per beneficiary are substantially high.


  • Since the investment is directly related to the stock market, the fund has the potential to lose money.
  • Financial firms do not have to disclose fund performance, costs, or risk when advertising.

See also

For more information on 529 plans, ask the experts at (888) 311-8881, or visit the following websites:

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