A 529 plan helps you save for your child's college education.
A 529 college savings plan is an investment account that allows you to save for your or your child's college education. Maximum contribution amounts differ between the two varieties of 529 plans.
Significance
A prepaid tuition 529 plan allows you to purchase future college credits at the current price, according to the Securities and Exchange Commission. A college savings 529 plan, also known as an investment plan, does not "lock in" existing tuition prices, but allows you to invest a certain dollar amount into a savings account that gains money over time.
Function
Although you must pay normal income taxes on the dollar amount of your 529 investment plan contribution, any additional investment earnings are not taxed, according to the Wall Street Journal. However, because prepaid plans cannot earn money, they do not have this advantage.
Limits
A college savings 529 plan had a maximum contribution amount of more than $200,000 as of September 2010. Although no limit for a prepaid plan exists, you contribute funds into the account in a lump sum and installment format, based on the current age of the beneficiary and the number of years of college that you want to purchase.
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