by Stephanie Harkey
Section 529 Plans- Prepaid
This is a college savings plan that guarantees increases in value at the same rate as college tuition. Prepaid tuition plans are operated by state governments, with the tuition guarantee based on an enrollment-weighted average of in-state public college tuition rates.

A prepaid tuition plan functions by purchasing units — each unit corresponds to a % of tuition or contracts — a specific number of years of tuition. Anyone can contribute including grandparents, friends and family. Prepaid 529 plans are great because they lock in tuition at the current rates (hedge against inflation). There is no guaranteed admission. Contributions receive tax deferred growth and tax free withdrawals if funds are used for qualified higher education expenses (tuition, room and board, fees, books, supplies and equipment). If the child dies or decides to not go to college, the plans can be transferred to another member of the family. This plan can also be used out-of state but is geared toward in state college attendance and the account owner or beneficiary must be a state resident when the account is opened. If a student chooses to attend a different college, the parents are responsible for paying the difference between the average public state college and the college of choice. Penalties and reductions in investment returns for non qualified withdrawals and cancellations exist. Some colleges require contributions for a 10-year time period from the date of expected college entrance or high school graduation. The funds must be used by the time the beneficiary reaches age 30.

Section 529 Plan — Savings
Section 529 college savings plans are tax-exempt college savings vehicles with a low impact on need-based financial aid eligibility. Unlike prepaid tuition plans, there is no lock on tuition rates and no guarantee. Investments are subject to market conditions, and the savings may not be sufficient to cover all college costs. Section 529 college savings plans are considered assets of the account owner and not the beneficiary. Contributions receive tax deferred growth and tax free withdrawals if funds are used for qualified higher education expenses (tuition, room and board, fees, books, supplies and equipment). Investments should start aggressive and switch to more conservative strategy as college approaches. No restrictions on choice of college, other than that it must be an accredited post-secondary institution. There is also no date by which funds must be used. If you cancel and receive a refund you must pay federal income taxes on earnings, a 10% penalty and any nonqualified withdrawals are taxed as ordinary income to the account owner. There may also be state and local income taxes and penalties as well as plan penalties. However, you can change the beneficiary at any time to another family member.

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