529 Prepaid Plan

These plans offer many of the same features and options as a 529 savings plan with one important destinction - they allow you to purchase a certain percentage of tuition credits for in-state postsecondary programs over time that is guaranteed to be equivalent to the same percentage of tuition in the future.

Contributions

  • Vary by type of contract
  • No limit on income to contribute
  • No age limitation to contribute

Deductions

  • No federal deduction for contributions (state deductions vary by plan and account owner's state of residence)

Withdrawals

  • Account owner controls withdrawals
  • Proceeds must primarily be used for tuition/fees from in-state postsecondary programs; in many cases, proceeds can be used for out-of-state tuition, but rates may not be equivalent

Taxation

  • Account earnings are tax-deferred
  • Qualified withdrawals vary by the account owner's state of residence
  • Nonqualified withdrawals are taxed on the federal and state levels at the account owner's or beneficiary's rate, depending on to whom the 529 plan provider directs and reports the distribution
  • 10% penalty on earnings for nonqualified withdrawals

Other

  • Plans are assets of the account owner
  • Reduces federal aid by 2.6% to 5.64% of the 529 plan's value
  • Typically, plan beneficiaries can by changed (see specific plan rules)
  • Typically, 529 plan funds are removed from the donor's estate (see specific plan rules)

 

Source: Raymond James MFRM-01630518