Prepaid College Plans by State: What Does Each State Offer?

College is a major expense. Even with years of thoughtful saving and planning, the costs can add up quickly. Prepaid college plans are one option families are choosing to work out a smoother financial process for students and parents alike. These plans used to be more readily available, but have scaled back in recent years. Still, it’s worth looking at prepaid college plans, where you can get one, and whether they’re a smart financial decision.

What Are Prepaid College Tuition Plans?

If you have a student who definitely plans on going to college someday, a prepaid college tuition plan can help set them up for success. You, as a parent, guardian, or relative, can start paying for college now, long before the student actually attends. This locks in the current tuition rate. Even as rates go up in subsequent years, these plans allow you to keep paying the tuition rate you initially locked in.

You can think of it as a loan of sorts. You pay up front, and the state earns money off of those payments. When it comes time for your student to attend college, the state pays the tuition out of the funds you provided.

Of course, you need to be confident in your student’s plans for this to work. You will probably need to live in the same state as the college the student will attend since these plans tend to apply only to in-state tuition.

The Pros and Cons of College Prepaid Plans

Obviously, locking in a lower tuition rate can be a tremendous financial benefit. With college costs constantly on the rise, a prepaid tuition plan offers the potential of a steep discount. And you might even enjoy some tax breaks if you choose this approach, such as a deduction based on your contribution to a prepaid plan, depending on where you live.

However, this sort of plan can be somewhat inflexible. You may be limited in the choices you have in terms of schools. While you can get a refund if your student chooses a different school than you all expected, you may end up feeling some pressure to stay the course when investing in a plan like this.

And you can’t use the money freely. There are restrictions to how you can use the funds in a prepaid college plan. For example, room and board probably aren’t covered. These plans generally focus specifically on tuition and fees.

Despite this, many choose prepaid college plans to lock in a rate. They also enjoy the high contribution limits and tax benefits. Let’s look at an overview of the major pros and cons of these plans.

Pros Cons
Steady tuition rate Lack of flexibility
Tax breaks Eligibility limitations
High limits Lack of control

Prepaid College Plans vs 529 Program

College prepaid plans and 529 college savings plans are similar. They serve the same basic function. However, when you look closer, they can be quite different. Prepaid tuition plans are a type of 529 plan, in fact, but 529 savings plans have distinct features that might sway your decision about investing in one or the other. Here are three of the biggest differences.

Prepaid College Plan 529 Savings Plan
Timeframe You must start investing within a certain time period. Different states will have different rules about this. You can generally invest whenever you like.
Flexibility These plans are less flexible. You generally have to spend the money on tuition and fees specifically. You have more flexibility in how you spend your money here. You can use funds for books, room and board, and other expenses, as well as tuition.
Risk These plans are stable. However, they won’t earn much over time. If your student changes their mind and you withdraw the money, expect to break even. These plans aren’t risky, but they aren’t going to earn much either. This is an investment. It could earn far more than a prepaid plan, but it does involve stock investments.

The National Prepaid College Plan

While many prepaid college plan options are state-run, there is also a national program called the Private College 529 Plan. Unlike other prepaid college plans, there’s no state residency requirement to join this plan. It applies to nearly 300 colleges and universities. However, they are all private institutions, not public. They span 30 states plus the District of Columbia.

The national plan offers a bit more flexibility than state plans, and you don’t need to choose a school to start saving. That decision can wait until your student is actually enrolling, in fact. As long as it’s one of the private institutions that are part of the plan, you can use your funds there.

States With Prepaid College Plans

Only nine states still have prepaid college plan options, and each state will offer something a little bit different. You can compare all of the options below to see if any of these state plans work for you.

State Plan Features
Florida Florida 529 Prepaid Plan The child must be a Florida resident. This plan covers tuition and fees and you can opt into a one-year dorm plan as well. Florida lets you use this plan nationwide and it’s guaranteed by the state so you won’t lose money.
Maryland Maryland Prepaid College Trust You can start by prepaying for just a single semester. This plan also works for out-of-state tuition. And it offers an income tax deduction for Maryland residents.
Massachusetts Mefa U.Plan You can contribute the full cost of tuition and fees to this plan, which is invested in bonds. You can transfer the funds or cash out and receive your investment plus interest if your plans change.
Michigan Michigan Education Trust Michigan offers a discounted, age-based pricing structure. Plus, you can transfer the funds to other family members. The funds work at in-state, out-of-state, and even trade schools.
Mississippi MPACT You pay a lower monthly rate for younger children when you enroll in this plan. You have to use the funds on tuition and fees, but anyone can contribute to the plan.
Nevada Nevada Prepaid Tuition Program There are some eligible out of state and private institutions that qualify under this plan. The student must use the funds within six years of graduating high school.
Pennsylvania PA 529 Guaranteed Savings Plan This plan only applies to state universities. However, you can also use it for up to $10,000 at elementary and secondary public, private or religious schools. You can alter your contribution levels at any time by changing your tuition level.
Texas Texas Tuition Promise Fund Save for public colleges and universities in Texas with this plan, excluding medical and dental institutions. You must enroll between September and March.
Washington Guaranteed Education Tuition You can use your funds on schools nation-wide. You can even use the funds for room and board, books, computers, and other expenses. As long as you use the funds for higher education, they won’t be subject to tax.

Are Prepaid College Plans Tax Deductible?

It depends on the state and plan, but in many cases, yes! There may be stipulations, though. For example, you’ll probably have to use the funds for higher education only. However, withdrawals for educational purposes may be tax-free. Moreover, your contributions to the plan could earn you deductions.

Are Prepaid College Plans Worth It?

That depends on where you live and what your student’s goals are. If the future is pretty certain, or you live in a state with a very flexible plan, a prepaid college plan can be a safe, stable way to save up money for college.

Because of the limitations and lack of flexibility, though, it may not be right for everyone. If, for example, you want to be more aggressive about your college planning, a 529 savings plan might suit your goals better. Plus, you can spend that money on things beyond just tuition and fees.

Alternative Methods for Prepaid College Plans

Beyond a prepaid tuition plan, you can also try a college savings plan to build up cash for college. This allows you to save up money and spend it however you like, including for education. It doesn’t lock in a tuition rate, either, but because it’s a more aggressive type of savings plan, you could end up saving up more money in the long run.

There is also a national option. This plan applies even in many states that don’t have their own prepaid tuition plans. It also locks in rates, but you will have to choose one of the schools covered by the plan. Luckily, there are almost 300 to choose from.

Of course, if your child is headed to college in the next few years, you may not have time to save much money. Parent PLUS loans can help. When an undergraduate’s financial aid doesn’t meet the cost of attendance at a college or career school, parents may take out a Direct PLUS Loan in their name to bridge the gap.

The Takeaway

The looming threat of student loans scare off many who would otherwise attend a college or university. But with some strategic and long-term planning, college can fit in the budget. You can mix and match approaches to find what works for you. For example, you could combine a prepaid tuition plan with a no-fee student loan to make college more affordable. No matter what you ultimately choose, it will help to start planning well in advance.


Photo credit: iStock/dangrytsku

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How to Donate Money and Reduce Your Taxes This Holiday Season

It’s that time of year. Neighborhoods are twinkling with decorative lights, shoppers are filling stores in search of must-have gifts – and financial advisers are busy helping clients finalize their last-minute tax planning for 2021.

It’s also the season when many charities receive the bulk of their annual donations, as the holiday spirit inspires people to give a little more. As we near the end of 2021, investors who’ve seen their portfolios grow significantly due to gains in the stock market may be feeling particularly generous, especially if the painful challenges of the pandemic have opened their hearts to giving more freely.

If that idea resonates with you, your first instinct might be to mail a check or pledge a donation online to your favorite nonprofit. While doing so may be perfectly fine, you may be missing out on certain tax advantages that come with alternative ways of giving.

Here are some ways to extend your generosity, and at the same time potentially reap tax savings.

Gain by Giving Through Qualified Charitable Contributions

If you’re age 72 or older, you need to make required minimum distributions (RMD) from your individual retirement accounts (IRAs). But if your RMD amount is more than you need to cover your expenses, you may have a great opportunity to give to charity while managing your tax bill.  Simply have your IRA provider send the RMD amount – or more – directly to the charity.

This strategy is known as a qualified charitable contribution (QCD). The QCD fulfills your RMD obligation, and the amount distributed to the charity does not count toward your income taxes, as long as it’s less than the annual exclusion limit of $100,000. And if you file a joint return, your spouse can claim a QCD for up to $100,000 as well.

While the age for required minimum distributions has been moved to age 72, the ability to use QCDs is still age 70.5. So, tax filers within this age group, regardless of whether they itemize, can make a charitable contribution under the exclusion limit directly from their IRA to a qualifying charity.

Utilize Gift Tax Exclusions 

In some situations, you may want to give directly to a person.  If this is the case, you can take advantage of the annual gift tax exclusions.

The IRS allows anyone to give up to $15,000 (in 2021) to another person, and the gift transfers without adding to the taxable income of the recipient or counting against your estate and gift tax exclusion amount. Since each individual may make gifts up to the annual gift tax exclusion amount per recipient, you and your spouse can each give $15,000 to the same person. This means you and your spouse could jointly give a friend dealing with a financial hardship, for example – or a loved one who suffered an unexpected loss – $30,000 without gift tax consequences.

We know that many people plan to leave an inheritance to family members. However, in some cases you may want to consider giving to those family members prior to your death, so that you can see your loved ones use and enjoy your gifts. This idea of “giving while living” can be another way to use the $15,000 annual gift tax exclusion.

Similarly, you can also fund a child’s or grandchild’s education by contributing to a 529 college savings plan – but keep in mind the $15,000 per person gift tax exclusion applies (though there is an accelerated five-year gifting rule that could apply, see your tax adviser).

Gift Your Winners

When people donate to their favorite charity, they usually pull out their checkbook or credit card. But there is another option to give to causes you care about that may be very beneficial this year given the markets’ record highs: You can gift appreciated stock shares that you own.  The organization can cash out the stock at the current asking price, and you won’t be taxed on the capital gains from the asset’s appreciation.

If you donate appreciated stock that you’ve held for more than a year, then you’ll generally be able to claim a potential charitable tax deduction for the full fair market value of the stock. This approach avoids paying the capital gains tax that would result if you sold the stock and donated the cash. 

As you carry out your giving plans, consider using one of these tax-savvy strategies.  They can make the holidays even happier for you and those you care about.

This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax adviser or attorney regarding their specific situation.
Ameriprise Financial Services, LLC. Member FINRA and SIPC.  

Senior Vice President, Financial Advice Strategy and Marketing, Ameriprise Financial

Marcy Keckler is the Senior Vice President, Financial Advice Strategy and Marketing at Ameriprise Financial. She also oversees the Confident Retirement program. Marcy has been with Ameriprise Financial (formerly American Express Financial Advisors) for 21 years in a variety of positions in financial planning, marketing and interactive development.

Source: kiplinger.com

Utah 529 Plan for College Savings

You don’t even need to mention it to the IRS on your federal taxes.
Contribution options include online payments, checks, money orders, income tax refunds, payroll, bank transfers and rollover funds from other accounts.
Want to move the needle as soon as you launch your college savings investment plan? Give your Utah Educational Savings Plan a boost from this introductory offer from the Upromise Mastercard, backed by Barclays Bank, FDIC insured.

What Is a 529 Savings Plan?

Get the rundown on Utah’s 529 plan for college savings, find out how rewards programs like Upromise can help you grow funds even faster.

While you can’t skirt payroll taxes to contribute to them, the money generated from a 529 plan is generally tax-free if used for qualified expenses.
Privacy Policy
These plans typically generate money for college through mutual funds, a shared portfolio of investments, but they can use individual funds too. Unlike retirement accounts, you can’t make pre-tax contributions to them.

Taxed deferred

You can claim a 529 plan tax deduction on your income taxes, a tax credit that enables you to contribute even more. The State of Utah offers a 5% tax credit of up to ,070 for single filers, ,140 for married couples in 2021.

Tax deductions 

Here’s a rundown of some of the top benefits of 529 plans and the ways they can grow your college savings:

No federal taxes

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Account holder control

You must be at least 18 years old to open a Utah 529 plan.

Accessible

Link your 529 account with Upromise to get rewarded for savings. You’ll get .29 just for joining the program and if you link your account.

Flexible

0,000 total per beneficiary ― but you can contribute to someone else’s fund.

Ground Rules on Utah 529 Plan Withdrawals, Beneficiaries and More

The beneficiary has no control over when or how much money is withdrawn from the account, or any say on investment options. The account holder has to request a withdrawal for qualified expenses or pay a penalty for a non-qualifying disbursement. So no, your student can’t blow your savings on digital currency for Fortnite or Roblox.
Conventional 529 plans let you choose the investment vehicle you feel will serve your needs best, but prepaid plans leave the investing to the state.

Who can benefit:

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Account holder requirements:

529 plans are tax-advantaged investment accounts used to grow money for education expenses. They come in two forms: the widely used education savings plan and the dwindling prepaid tuition plan, which is only accepted at a handful of Utah colleges.

Who can contribute:

Knowing what it takes to start and maintain a 529 college savings plan is one thing. Making the most of it is another. But there are services that can help you maximize your investments and hit your goals. Upromise is a rewards program that offers tools and advice to help you hit your savings goals, maximize your plan’s benefits and find additional ways to save along the way.

Ways to contribute:

As flexible as 529 plans are, there are still rules regulating them.

Age-based limits:

Neither you nor your beneficiary has to live in Utah to qualify for a 529 plan in the state. Yes, you can start a Utah educational savings plan and use it for qualified expenses in another state. However, your account will still be subject to Utah’s rules.

Annual contribution caps:

Anyone with a Social Security number or tax identification number can be a beneficiary.

Lifetime contribution caps:

Anyone can contribute: family, friends, acquaintances — though only the account holder can claim the tax deduction.

Qualified expenses:

529 plans may impact need-based financial aid. If one of the beneficiary’s parents is the account holder, needs-based financial aid could be decreased by up to 5.64%. If you’re both the beneficiary and account holder, that deduction could climb up to 20%.

Non-qualified withdrawals:

For non-qualified expenses, money generated from 529 investments is subject to state income tax and a 10% penalty.

More Frequently Asked Questions about 529 College Savings Plans 

Upromise also offers a Mastercard, an optional debit card you can use to earn cashback on purchases, such as groceries and household items, and apply those funds to your Utah 529. It’s a force multiplier for saving for college.

How Do 529 College Savings Plans and Prepaid Tuition Compare?

You don’t have to be an experienced investor to generate money from your 529 plan. But you’ll likely have general options for how aggressively or conservatively your account targets growth. The closer to college a student is, the more you’ll likely want to ease off the gas and target safer investment options.
,000 per beneficiary ― you can contribute more, but you’ll be hit with a gift tax.

How will a 529 Plan Impact Financial Aid?

Still got a few “what abouts” lingering in your mind? As simple as it is to set up and maintain a 529 college savings plan, you’ll probably want to make sure you’re maximizing this long-term investment in higher education. Here are some more frequently asked questions:

What happens to unused money in a 529 plan?

Both are technically 529 plans. But while conventional 529 plans are becoming more popular, prepaid tuition plans are dwindling. Prepaid tuition plans are more rigid. They’re only accepted at participating schools, down to just eight institutions in Utah, and any money generated from them is only used to lock in the current rate of tuition.

  • Roll over the money into another beneficiary’s account, including K-12 tuition.
  • If the beneficiary decides not to go to college, other forms of training, such as vocational school or apprenticeships may qualify.
  • Pay taxes on it and take the 10% penalty to use the funds on something other than education. You might break even or still come out ahead.

How to Start a 529 Plan

Source: thepennyhoarder.com
Ready to stop worrying about money?
Plans can also generate money through 529 rewards programs that help grow savings accounts through cashback programs.
If there’s a theme here, it’s that 529 plans are flexible. You have plenty of options for unused money in a college savings plan:
Eligible expenses include tuition, books, fees, supplies, computer equipment, certain software, education loan repayment and room and board when enrolled in enough credit hours to be considered a part-time student. Other higher education expenses may qualify.
529 plans are tax-advantaged investment accounts that allow you to invest and grow your money to use on qualified education expenses. And the state of Utah happens to offer some of the best 529 college savings plans in the country — and it’s not just for Utah residents. <!–

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Beyond the requirement for the account holder, there are no age-based limits on Utah’s 529 plan. The student doesn’t have to use the funds in the Utah 529 plan by a certain age or before a certain amount of time has passed.

Thoughts Before Funding a 529 College Savings Plan

College costs have outpaced inflation. Looking back at the last decade, the 10-year historical rate of increase has been approximately 5% per year, according to The College Board. Luckily, there’s a tax-advantaged way to save for these growing college expenses: the 529 college savings plan.

529 basics

When it comes to saving for college, opening a regular savings account/custodial account for your child is an option, but you’d miss out on the benefits of a 529 plan, such as the tax-free growth on earnings if the funds are used for qualified college expenses. Deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion (for 2021). You can also front-load your investment in a 529 plan with $75,000 ($150,000 if joint with your spouse) and use this toward your gift tax exemption for five years, providing there have been no other gifts to that child. This is something that is not possible for a regular savings/custodial account for your child (you would only be able to gift $30K jointly). By adding a large amount up front, you allow the lump sum to grow over a longer time horizon vs. making smaller contributions over time. Contributions to a 529 plan do not have to be reported on your federal tax return.

Contributions to a 529 plan are not tax deductible (although some states do offer tax benefits), but the earnings grow tax free and are not taxed if used to pay for education. Another advantage compared to a custodial account is control; the named beneficiary has no legal rights to the funds, so you can ensure the money will be used for education.

Also on the plus side, a 529 account owned by someone other than the parent (such as a grandparent) is not considered an asset for financial aid purposes. In addition, the value of a 529 account is removed from your taxable estate, yet you retain full control over the account.

How to choose a 529 plan?

Research the underlying expenses of the mutual funds and review the investment options available compared to other plans. The age-based models may be the easiest to manage, as the plan shifts to more conservative investments as the student gets closer to college age. You can choose any state plan no matter where you live, but if you reside in a state that provides tax breaks for using your state plan, you would likely want to start there. For example, New York residents get tax benefits for using their state plan. Keep in mind that you have the ability to move your 529 to another provider, but only one rollover is permitted per 12-month period.

How much to fund?

The amount to contribute to a 529 plan depends on several assumptions, such as whether you expect your child will attend a public college or a private college, the returns during the investment time horizon, and future college inflation. Funding goals vary widely depending on what you would like to achieve and the assumptions involved — and of course there is no right answer.

 If the beneficiary does not go to college, you can transfer the 529 plan to a sibling in the future or to another family member, such as a cousin or grandchild. If you don’t have any eligible family members, the worst-case scenario is that you would have to pay tax and a 10% penalty on the earnings to take the money out for another purpose. Withdrawals from a 529 plan that are not used for the beneficiary’s qualified education expenses are taxed and penalized (subject to a 10% federal penalty and taxed at the income tax rate of the person who receives the withdrawal). If the beneficiary gets a scholarship, then the penalty is waived.

Considerations if you have more than one child

If you have several children, it may make sense to fully fund the first plan for the oldest child, and if the funds are not used, they can be transferred to the next child in line. You probably want to avoid fully funding all the plans in the event one child does not end up going to college, gets a scholarship, or starts a business. Some schools and some trade schools/programs do not qualify for 529 funds (for example, if a grandchild wants to go to a specific acting or cooking school). You can find out if your school qualifies by using this link: http://www.savingforcollege.com/eligible_institutions/.

Avoiding tax penalties on 529 Plan funds – not all expenses are qualified

Avoid overfunding the 529 if possible, as “qualified education expenses” do not cover all expenses related to college. Qualified expenses include:

  • Tuition and fees.
  • On-campus room and board.
  • Books and supplies.
  • Computers and related equipment.

On the other hand, several costs related to college aren’t considered qualified expenses. These costs can easily add up, so it may make sense to save outside of a 529 plan to help cover them. Funds from a 529 plan cannot be used for:

  • The purchase of a car, fuel costs or public transportation costs to and from school. 
  • Any insurance (car, health etc.) cannot be paid with 529 funds either.
  • If your child is a member of a school club or involved in a sports activity, any related fees and costs are also not qualified.
  •  It might seem intuitive that, if you have a student loan, you can use funds from a 529 to pay off the balance, but this is also not permitted.

If your child is planning to live off-campus, in housing not owned or operated by the college, you are unable to claim expenses in excess of the school’s estimates for room and board for attendance. It is important to confirm room and board costs with the school’s financial aid office, in advance, so you know what to expect. Also, keep in mind that, in order for room and board to qualify, your child must be enrolled half time or more.

Finally, if your child is studying abroad, check with the school to find out if the study abroad program qualifies for 529 funds.

If you inadvertently use funds for the wrong expenses, you will end up being taxed on the earnings, as well as face a 10% penalty on that amount.  Although 529 plan accounting tends to operate on the honor system, as you have to track your own expenses, using funds for the wrong items could have consequences in the event of an IRS audit.

Paying for college is a large expense for many families. 529 plans are a tax-advantaged way to save for college, but they come with some complex rules and restrictions — so understanding how these accounts operate before investing could save you from incurring unexpected tax penalties in the future.

Senior Financial Adviser, Evensky & Katz/Foldes Financial Wealth Management

Roxanne Alexander is a senior financial adviser with Evensky & Katz/Foldes Financial handling client analysis on investments, insurance, annuities, college planning and developing investment policies. Prior to this, she was a senior vice president at Evensky & Katz working with both individual and institutional clients. She has a bachelor’s in accounting and business management from the University of the West Indies, she received an MBA at the University of Miami in finance and investments.

Source: kiplinger.com