Happy 20th Anniversary 529 College Savings Plans!
In honor of the 20th anniversary of 529 College Savings Plans, Capital Area Asset Builders (CAAB) invites all residents of the Greater DC Area to learn of the benefits of these great mechanisms to save for post-secondary education.
District of Columbia residents, please visit http://www.dccollegesavings.com/ to learn more of the DC College Savings Plan.
Maryland residents, please visit https://maryland529.com/ to learn more about Maryland529.
Virginia residents, please visit http://www.virginia529.com/ to learn more about the Virginia529 College Savings Plan.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.
What are the differences between pre-paid tuition plans and college savings plans?
Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.
College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
The following chart outlines some of the major differences between pre-paid tuition plans and college savings plans.1
| Prepaid Tuition Plan | College Savings Plan |
| Locks in tuition prices at eligible public and private colleges and universities. | No lock on college costs. |
| All plans cover tuition and mandatory fees only. Some plans allow you to purchase a room & board option or use excess tuition credits for other qualified expenses. | Covers all "qualified higher education expenses," including:
|
| Most plans set lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition purchased. | Many plans have contribution limits in excess of $200,000. |
| Many state plans guaranteed or backed by state. | No state guarantee. Most investment options are subject to market risk. Your investment may make no profit or even decline in value. |
| Most plans have age/grade limit for beneficiary. | No age limits. Open to adults and children. |
| Most state plans require either owner or beneficiary of plan to be a state resident. | No residency requirement. However, nonresidents may only be able to purchase some plans through financial advisers or brokers. |
| Most plans have limited enrollment period. | Enrollment open all year. |
1 Source: Smart Saving for College, FINRA®
About Capital Area Asset Builders
Capital Area Asset Builders (CAAB) is a non-profit organization whose mission is to empower low- and moderate-income residents of the Greater DC Area to take control of their finances, increase their savings, and build wealth for a better future.
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