Monday, September 27, 2010

Uncertain Market Boosts Appeal of Prepaid 529 Plans

With the volatility of the stock market, some parents are looking at safer ways to save for a child’s college education. Prepaid 529 plans offer parents (and other family members) opportunity to lock in tuition at today’s rates.

Up until now, traditional 529 saving plans have been popular . These traditional plans allow parents or other family members to invest money for a child’s education tax-free, usually in a mutual funds. But prepaid plans are gaining ground now that the market has dramatically reduced the value of many investment-based saving plans.

A prepaid 529 plan is usually operated by the state government, although some colleges and universities offer their own plans. Plans come in two basic flavors: unit or contract. Unit plans are a fixed percentage of tuition (e.g, one unit is one percent of tuition costs). Individuals can buy as many units as they want each year. Contract plans allow individuals to purchase a specific number of years of tuition. While the plans will not increase in value as a traditional 529 might, the tuition is guaranteed. The plan also will not decrease in value as the traditional 529 might.

A down side of prepaid plans is that they are usually tied to a state’s in-state tuition rate. If a family relocates out of state, the family may have to pay the difference in tuition. Most plans have provisions for paying costs at non-state schools just in case the student decides that a state school is not what they want.

By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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