College Savings Plans

A 520 plan is a college savings planning tool. The number 529 is the Internal Revenue Code Section for which it is named.

There are two types of 529 plans:

  • Prepaid Tuition Plans
  • College Savings Plans

Basically, a parent (or grandparent) puts money into an account so that the money can be withdrawn to pay for the college expenses of a child (or grandchild).

If the investment account grows over time, the withdrawals should be tax-free as long as the funds are used to pay for tuition and/or room and board at a college (a.k.a. qualified higher education expenses).

Prepaid Tuition Plans

Many states have have set up Prepaid Tuition Plans for their schools and, in some cases, the investment is guaranteed. If you know which college you want your child (or grandchild) to attend, prepaid tuition plans offer an excellent opportunity to pay for college credits and units and, in some cases, other higher education expenses.

By setting up a Section 529 plan for Prepaid Tuition, you get the chance to buy tuition at current rates. That way, if the tuition at your chosen school rises, you could end up paying a lot less for their college.

Prepaid Tuition Plans outline exactly how much the recipient (beneficiary) can receive, based on the number of years of college and other factors. The amount of money you set aside each year is determined by the prepaid tuition plan and the beneficiary’s age.

Prepaid Tuition Plans are usually for state of residency and other limitations (such of length of schooling) should apply. The timing of the enrollment (set-up) will be limited and/or vary depending on the state.

College Savings Plans

A College Saving Plan is more broad based: Many expenses can be covered, not just tuition. Of course, the expenses should be directly related to the cost of higher education. There are, however, limits to the amount of money you can contribute to these types of plans.

College Savings Plans usually do not offer guarantees, but you can have the money apply to either a child or an adult, whereas the Prepaid Tuition Plan is normally for a child.

College Savings Plans are usually purchased through a licensed broker or investment specialist whereas a Prepaid Tuition Plan is usually purchased through the state of the college/institution.

After the investment account is set-up, if you withdraw the money early (and not for college), there’s a 10% penalty (reported on your tax return) for the amount the money has grown (appreciated). The state tax effect of this transaction could vary.

Some states offer incentives to purchase into a Prepaid Tuition Plan, such as a deduction on your tax return during the year of your lump-sum investment.

It’s a good idea to seek the help of a professional with regards to a Internal Revenue Code Section 529 plan.