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To Choose or Not to Choose a 529 Plan? Part II

A question we get a lot is…should I invest in a 529 plan for my kids’ college? The answer is…maybe. A 529 plan is an education savings plan operated by a state or educational institution. It has been created to help you save and invest funds for future college costs. There are 2 basic initial differences in 529 plans: Last week we wrote about The College Savings Plan. This week we’ll cover The Prepaid Tuition Plan.

Prepaid Tuition Plan:

  • You purchase tuition now for use in the future.
2 Types of plans:
  • Contract – a “guaranteed interest plan,” promises to cover a predetermined amount of tuition expenses in the future in exchange for your lump sum or periodic contributions of money to the plan.
  • Unit – you purchase a certain percentage of units (or credits) and the plan guarantees that whatever the percentage of college costs such units cover now; the same percentage will be covered in the future.
Prepaid Tuition Plan:
  • Gives you some guarantees.
  • Less Flexible—typically only fully covers tuition at in-state public colleges.

Hopefully you read both this brief article as well as last weeks in order to see the difference in choice. Think it’s a no brainer? No guarantee vs. guarantee? Well, even though Prepaid Tuition Plans typically guarantee your investment return, plans sometimes announce modifications to the benefits they’ll pay out due to projected actuarial deficits. The battered finances of some state governments have raised questions about whether some plans will live up to their promises. According to Joseph Hurley, a CPA and the founder of Savingforcollege.com, “It’s a model that doesn’t always work.” Numerous states have shut down their plans or changed them as their deficits widened. And, shortfalls in some state plans have bumped up prices by charging substantial premiums above the cost of current tuition, according to USA Today.

Still not certain if a 529 plan is right for you and your family? You’re not alone. Here is some good guidance directly from the IRS from IRS.gov on 529 plans:

Is setting up a 529 plan for my child right for me?

“Only you can figure that out. 529 plans are not for everyone, and are also not the only option available for paying for college. Setting up a 529 plan is an investment decision, which means both the benefits and drawbacks must be considered, along with alternative ways of accomplishing the same thing. There are many independent sources of information on 529 plans. Also, you may want to consider consulting a trusted tax professional or financial planner.”