Parents and grandparents often ask Allegiant Advisors, "What is the best way to save for a child's college education?" The easy answer is "early and often," but there are many ways to go about saving and educational planning. The Allegiant Private Advisors team hopes to shed light on two of the primary avenues for saving: Florida Prepaid and 529 plans.
Before we get into the details, a quick note on 529 plans: these are tax-advantaged savings and investment plans that are administered by states. Every state has at least one option, and the plans carry significant benefits. They can provide families with a tax-friendly way to get ahead of the cost of college – which continues to outpace inflation and break new records every year. For more on how the plans are evolving, read "Important Improvements to College Savings Accounts."
|Florida Prepaid||529 Plan|
|Key Benefit||Locks in the current tuition cost||Opportunity for investments to outperform FL Prepaid rates|
|Investment Risk||Shifts the risk to the program provider||Held by the account holder|
|Timeframe for Use of Funds||Tuition is locked in for up to 10 years after the expected attendance date||Can be used at any time for qualified education expenses (including trade or vocational schools and more)|
|Payments||Set cost/payment options||Flexible contributions|
|Tax Benefits||Benefits paid are tax-free for qualified educational purposes||Withdrawals are tax-free if used for qualified educational expenses|
|Unused/Remaining Funds||Refund of premiums if not used for college||Funds can remain in the account for an unlimited time period and enjoy tax deferral|
Allegiant's Wealth Advisors carefully compare and review all savings options available to clients as part of our customized approach to planning and comprehensive wealth management. When comparing Florida Prepaid vs 529 Plans, a key distinction is which party carries the investment risk.
Florida Prepaid has its advantages and disadvantages. Those who want to offload the investment risk to someone else will find this plan appealing, as the state is taking all the risk with this option. The idea of knowing that a child or grandchild's education is taken care of no matter how high tuition and expenses rise is a comfort that some need. Payment schedules can be set up to suit different situations, such as through monthly, 5 pay, or lump-sum payments. Different packages can be selected as well depending on whether the plan owner is saving for options like College or Universities, 2 or 4 years of tuition, and Dormitory coverage.
529 plans tend to be a great vehicle for those who are comfortable with investment risk and may want to use the funds for educational expenses prior to college. This was a new caveat that was added to the plans under the Tax Cuts and Jobs Act of 2017. Flexibility in that form is something that we have not seen before, and it could be a deciding factor for some. These accounts offer the most flexibility in the years before college, but they require monitoring and rebalancing as the child gets close to needing the funds. They also present a great option for estate planning, as they can be transferred from beneficiary to beneficiary with no transfer taxes after gifts are made.
Both types of plans work well in the case of children receiving scholarships or owners wanting to change the beneficiary. Families can shift benefits as opportunities arise – but that should not be the main selling point. The college or university that is chosen also does not impact the child, and the plans can be used to pay for out-of-state tuition or private tuition. However, prepaid will take the average of the in-state cost and apply to the actual cost, while the 529 is school-agnostic.
Keep in mind, it is best to talk with your advisor when considering gifts to these accounts to make sure that you maximize the contribution.
As you can see, each of these college savings vehicles is a viable option. Every state plan has its own design, and you are not obligated to invest in your home state's 529. We've focused here on the Florida Prepaid plan because many of Allegiant's client families are Florida-based, but our experienced team is always happy to research and help guide clients exploring different programs in any locality. Remember one guiding principle almost always applies: start contributing early and often!
Allegiant's Wealth Advisors look forward to discussing your circumstances and priorities to help determine the best options for you and your family.
240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237
Advisory Services offered through Allegiant Private Advisors, LLC, a Registered Investment Adviser