Ask the Experts: Does it make sense to consider a 529 plan if my child is only a few years away from college?

Ask the Experts: Does it make sense to consider a 529 plan if my child is only a few years away from college?

It might, because there are several advantages to funding a 529 account no matter what your child’s age. First, withdrawals that are used to pay college expenses are tax free at the federal level. So even if you’ve waited until your child is a sophomore or junior in high school to open an account, you’ll still have a few years of potential tax-free growth on your money.

Second, special contribution rules make 529 plans a favorable way to gift large sums. Specifically, you can make a single lump-sum contribution to a 529 plan of up to $60,000 ($120,000 if both you and your spouse contribute) free from federal gift tax as long as you treat the contribution as if it were made evenly over a five-year period. This strategy has the added benefit of reducing your taxable estate and minimizing potential estate taxes.

Finally, the federal government considers a parent-owned 529 plan as a parental asset in its financial aid calculation, and parental assets are assessed at a relatively nominal rate of 5.6% (compared to 35% currently for student assets). For financial aid purposes, 529 plans are treated no differently than mutual funds, stocks, bonds, and the like that are held in a parent’s name.

However, you should check one issue carefully before you open a 529 account this close to college. Some plans may impose a minimum holding period, such as one or two years, before any withdrawals can be made without penalty. So if you’re going to need this money soon, avoid plans with withdrawal restrictions. And before you invest, you should carefully consider the investment objectives, risks, charges, and expenses associated with 529 plans. You should also carefully read the issuer’s official statement for any 529 plan you’re considering.