Sec. 529 prepaid tuition vs. savings plans

When it comes to funding a child’s college education, Section 529 plans are a no-brainer. You can contribute regardless of income level, and contribution limits are high. Although you contribute after-tax dollars, all withdrawals — including earnings — will be free of federal income taxes as long as they’re used for qualified postsecondary education expenses. Some states even offer their residents a tax deduction for using their home state’s plan.

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There are two basic types:

  1. Prepaid tuition plans allow you to lock in tomorrow’s tuition costs at today’s prices. Typically used for in-state public universities, they can, in most cases, also be used to pay out-of-state or private college tuition. Prepaid tuition plans cover tuition only, not room and board or other expenses.
  2. Savings plans enable you to save for all qualified educational expenses. They’re managed by an investment company and range from conservative to aggressive. Some plans offer age-based options in which portfolios become more risk-averse as the child gets closer to college.

You’re allowed to participate in any state’s plan. But before choosing, research several plans’ investment strategies, historical performance, risk characteristics and fees. •

Other articles in the June 2013 Edition of Business Matters: