A Prepaid Education
529 prepaid college tuition plans offer an easy way to
save for an education.
Section 529 of the tax code established two types of higher education investment plans that receive
preferential tax treatment. The 529 college savings plan allows assets in the account to grow and
withdrawals for college expenses to be made tax free. The second type, 529 prepaid tuition plans, also
known as prepaid educational arrangements or PEAs, provides tax-deferred growth on savings for
tuition, based on the current cost of that tuition.
PEAs can be purchased in units, usually credit hours or a percentage of the
annual tuition fee, or in contracts for one to five years of tuition. Payment can
be in a lump sum or in installations. The states that administer PEAs guarantee
that your investment will, at the very least, match college tuition increases. For
that reason, these plans are typically much more conservative than other types
of college savings, so they may not be appropriate late-stage college saving.
Because PEAs can be purchased for the student by anyone, they allow aunts,
uncles, grandparents and even unrelated benefactors to help with educational
costs and, depending on the state, receive a break on their taxes. Most PEAs
are transferable to other members of your family – including parents, aunts,
uncles, brothers, sisters and children – if the original beneficiary decides not to
attend college. The distributions from the PEAs are not taxed by the federal
government, as long as they’re used for tuition and fees.
The primary drawback for PEAs is that states administering these plans usually require that the funds be
used for a school in that state. That may be a difficult commitment to make if your child is young and his
future career pretty much up in the air, although the ability to transfer to another family member
gives you one option if plans change.
PEAs are just one of the extensive opportunities for securing your child’s future and typically contain less
risk. By meeting with a trusted financial professional and finding out your options, you move one step
closer to helping your child take part in the most important investment of their lives: their education.
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