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Is a 529 a good short-term plan?

College Finance » Is A 529 A Good Short-Term Plan?

Don TaylorDear Dr. Don,
Our daughter needs some financial help. She's 40, single, just lost her job and has gone back to college for her master's degree. Can we open a Section 529 deferred tax account in her name?

Thanks,
-- Frank Funding

Dear Frank,
You need some pretty convincing tax reasons to go this route. College savings plans tend to be constructed so that any investment gains will be tax-free when the distributions are used for qualified higher education expenses. Your daughter, however, is already in college and could be using student loans. There's not going to be much, if any, investment gain, so that's not an advantage of opening the account.

The other benefit would be if your state offers a tax deduction on contributions to a Section 529 plan. Most states that offer this type of tax break require that you contribute to your home state's plan, although some states, like my home state of Pennsylvania, offer a deduction for contributions to any 529 plan. Some states also have a one-year waiting period so the account can't be used as a pass-through account to capture state income tax deductions. The dollar limit of the tax-deductible contribution will also vary by state.

I don't know how much you plan to help out, but the annual exclusion for gift taxes in 2013 is $14,000, or $28,000 if you and your wife split gifts. With a Section 529 plan, you can front-load five years' worth of gifts into the account up to $70,000 for a single-filer or $140,000 per couple. You could also just write a check directly to the college or university, and that amount would not count against your annual exclusion limits.

How long will it take for your daughter to earn a master's in her field? If it's more than a year, you should consider how your actions will impact her financial aid package.

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