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529 Plans Can Help People of All Ages Save for College

If you'd like to head back to college, you may want to pay the tab through a 529 savings account, which doesn’t impose age limits.

Here's how a 529 plan can benefit students of any age: The money that you stash into a 529 plan grows, tax-free, as long as it remains in the account. Even better, when you drain the account for qualified higher education expenses, you won't owe federal or, in most cases, state taxes.

Admittedly, the tax benefits can be greater when a parent or grandparent opens a 529 account for a baby. The money in an infant’s 529 plan can keep the Internal Revenue Service at bay for 20 or more years. The time horizon for a retired college student will obviously be shorter.

Educational late bloomers, however, should be particularly interested in the 529's upfront tax break. Thirty-two states reward investors with a full or partial tax deduction for contributions into their state-administered 529 plans. Five states—Colorado, Illinois, New Mexico, South Carolina and West Virginia—allow their residents to deduct their entire 529 contribution, regardless of its size. So if a Coloradoan dumps $10,000 into a state's plan, he or she can capture a $10,000 tax deduction. You can find the list of states that offer 529 tax deductions at FinAid, a college financial aid website.

This tax break can be huge for adults who create 529 accounts for themselves. Why? Because you can stash future tuition money in a 529 and capture the tax break for your contribution. States typically don't care how long the money remains in a 529, says Mark Kantrowitz, founder of FinAid. (Contact your own state to be sure.) "You could contribute to a 529 plan this tax year, go to school in the fall and take a distribution in the fall," he says. "There is no real holding period."

There is one catch: You won't qualify for tax-free withdrawals if you aren't enrolled in college at least half-time. Depending on the courses, however, two classes in a semester could satisfy the requirement.

There are some other limitations as well. You can only spend the money at schools that participate in the federal financial aid program. In addition, students cannot use a 529 kitty to pay for a cruise that offers a study abroad program, says Kalman A. Chany, author of Paying for College Without Going Broke. "If you are thinking of more exotic uses of the funds," he warns, "check with your accountant and the school to make sure it won't be a problem."

What if your educational career ends and you've still got cash in a 529? If you're feeling magnanimous, you can name a relative, such as a grandchild, as the account's new beneficiary. But if you'd rather withdraw the money for a car or a vacation, you'll have to pay income taxes on the earnings and a 10 percent withdrawal penalty.


Lynn O’Shaughnessy is a financial journalist based in California.

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