529 Plan

A 529 Plan is a tax-benefit plan aimed at paying for education expenses. The plan was originally designed to help cover postsecondary education expenses but was later extended under the Tax Cult and Job Hunt to include k-12 educational expenses.

Types Of 529 Plan

There are two broad types of 529 plan

  • Prepaid tuition plan

  • Savings plan

Prepaid Tuition Plan

This is offered by the state and institution in the form of a futures contract. It allows a beneficiary to prepay at the current price for a semester in a university or college. The advantage of this is that it shields the plan holder from tuition inflation which can be even more intense than the traditional inflation.

Prepaid tuition plan allows payment of higher education expenses over a particular period of time in the nearest future. For example, a prepaid tuition plan holder can pay for the next two semesters in school at the present price. This would guarantee the benefactor two semesters irrespective of the changes in the fee for the already prepaid semesters. The risk bearer is no longer the student but the management of the plan.

However, the contribution made in the plan is restricted to the amount the holder would need to clear his or her bill. The plan also operates a stipulated age limit and residence qualification. The purpose of the plan is also be restricted to tuition alone, textbook and other bills cannot be covered by a prepaid plan.

Assets in this type of plan are often restricted to a predetermined school or predetermined school list. Therefore, should the holder decide to go to another school not indicated in the plan, any increase in expense would be covered from the holder's personal account.

There is a unique type of prepaid plan called "Private College 529 Plan. This plan gives holders the opportunity to prepay tuition for a consortium of private schools. The disadvantage of this type of prepaid is the limited choice of school. Should a holder not get into one of the listed schools, the fund might be rolled over and the holder loses his or her gain.

Saving Plan

This is very similar to the IRA. The saving plan is a tax benefit plan that allows holders to save for the long-term. With this plan, holders are allowed to invest in different mutual funds targeted to the day the holder would begin his or her education.

However, the investor bears the risk of investment and whatever is made out of the investments is the eligible education price. Sometimes the investor might gain, and at other times, he or she might lose.

The important thing to note is that the type of 529 plan you use would determine the benefits you derive from it.

Options For Withdrawing 529 Plan

There are three options available to withdraw any of the two types of 529 plans

  • Send a check directly to the school

  • Send the check to yourself

  • Send a check to your beneficiary

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