Too late to start 529 college savings plan?

Dear Dr. Don,
My wife and I are late to the game for 529 college savings plans. We have two children, ages 18 and 9. We are in the 28 percent tax bracket.

The older child is starting college this fall and we have some money saved and other money coming from relatives for him. Does it make sense to open a 529 so late for him? If so, should we open it in his name or in my name?

Also, should we open a second account for our younger child? It seems to make sense to do so, since the investment strategies would be much different. If we open another account for him, can we later transfer any remaining funds from our older child to the younger child’s 529?
— John Jumpstart

Dear John,
The primary benefit of the Section 529 college savings plan is the tax-free distribution of investment earnings out of the account for qualified education expenses.

Your state may also allow you to deduct contributions into the account. Some states even have a contribution match to the account. You can see what’s available in your state at

If you open a 529 plan account for the older child, there’s not likely to be much in the way of investment earnings over the next few years — especially since you’d want to have the funds invested fairly conservatively.

So, you’re balancing out the value of any tax-deductible contribution into the account against the management fees and administrative expenses you’ll pay on the account.

As an example, I have a 19-year-old daughter in college. My home state, Pennsylvania, allows a deductible contribution up to the limits of the federal annual exclusion for gift taxes, which in 2010 is $13,000 for an individual and $26,000 for a married couple taking advantage of gift splitting.

I can contribute up to $26,000 to a 529 plan and by doing so, save about $800 in state income taxes. If I fund a State of Pennsylvania College Savings Plan, there’s no enrollment or annual fee, just an asset-based expense ratio of 0.7 percent to 0.75 percent.

Taking the higher expense ratio number, I’d pay about $195 in expenses on the $26,000, netting about $600 in tax savings before considering any investment returns.

Still, I’d suggest the primary focus should be on funding the younger child’s account. While current treatment of these accounts for financial aid is neutral between the parents owning the account or the student owning the account, I’d recommend you keep the money in your name with the child as the account beneficiary.

That’s especially true if you plan to fund a 529 plan for the older child but want to be able to use any remaining funds in the account after the older child graduates to fund the younger child’s college expenses. Read “Does a 529 plan affect financial aid?” in College Savings 101 for more information on ownership and beneficiaries.

Ask the adviser

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & Investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.

Bankrate’s content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate’s Terms of Use.