 529 plan for older, 'iffy' students
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 Dear College Money Guru,
I have something of an unusual question regarding 529 plans, designed for funding college educational expenses.
I'm considering opening a 529 plan for myself (a 35-year-old
single female) as a means of putting away some additional money.
I may, at some point, decide to go back to school (I have no children
and do not plan to have any, so my question is only in reference
to myself). In fact, while I have no plans for a master's degree,
I could see myself being quite happy spending a significant amount
of time on educational pursuits in my retirement. I've read the
overviews on 529 plans and understand that I would, eventually,
have to pay a 10 percent penalty (plus the regular taxes) on the
earnings when distributed if I didn't use it to pay for educational
expenses. Still, I'm currently maxing out my 401(k) contributions
and I think this may be a viable option to further my retirement
fund, even if I never decide to go back to school.
What are you thoughts on this? Is there any more serious
tax complication than what I'm reading in the FAQs regarding 529
plans? Can I even open a 529 plan for myself? And over the long
haul, would I be better off to invest in an IRA or some other vehicle,
even if I decided to use the money for education at some point down
the road?
Thanks in advance for your advice!
-- D.B.
 Dear
D.B.,
I heartily endorse your plan. 529s are flexible enough to accommodate the educational aspirations of adult Americans, even if you cannot be certain you will ever return to school. In fact, having the money set aside in a 529 plan may ultimately spur you to enroll in a college course, whether it's to pursue a degree or not.
I can point to my own family's experience as proof.
When our kids became teenagers, my wife decided to return to school
for a master's degree, which has helped her to advance her career
in nursing. She occasionally talks about going back for even more
schooling. And, yes, my wife does have a 529 account that names
her as beneficiary. Even if she never returns to the ivory halls,
she can keep the account intact for the educational needs of our
children, future grandchildren or even great-grandchildren.
You mention you don't expect to have children or grandchildren
of your own. But you may have nieces, nephews or other family members
with educational aspirations. If you at any time decide to redirect
your 529 funds to another family member, it will be an easy matter
to change the beneficiary on your account or make a partial rollover
to an account with another family member named as beneficiary.
In the "worst case," you will scrap your idea to return to school and instead use your 529 account for noneducational purposes. The account growth will be subject to ordinary income tax and an additional 10 percent tax if you withdraw it on a nonqualified basis.
Because of the tax and penalty, you may end up with
less money than if you had decided to put your savings into mutual
funds or other taxable investments from the outset. The outcome
depends on several factors, including tax rates in the future, your
tolerance for risk and your desired mix of stocks and bonds. Fixed-income
investors will benefit more from the 529 tax break than those looking
to invest in growth stocks. But the analysis must also consider
the extra fees charged by most 529 plans.
Even if you currently prefer equities over fixed income,
you may want to adjust your asset allocation later on. A 529 plan
gives you the ability to change your asset mix at least once per
year without taxes by switching investments or rolling over to another
529 plan. With mutual funds, an exchange constitutes a taxable sale.
The U.S. Treasury Department has expressed concerns about individuals using 529 plans as retirement accounts and has proposed increasing the penalty from 10 percent to 20 percent on nonqualified distributions taken more than 20 years after establishing the 529 account. If this proposal ever makes it into law, it will likely apply only to accounts funded after the enactment date.
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