NEW YORK (MainStreet) With the fall semester beginning, many parents and grandparents are thinking about how to cover college costs, whether for a student who's started college or for one with just a few years to go.
Tax-free Section 529 plans are a widely recommended college-savings option for young children, but what about these older kids? What's the latest you can put money into a 529 and still do better than the alternatives?
Answer: Pretty late, but only if you choose carefully.
These plans, set up by the states, allow parents, grandparents or anyone, in fact to escape federal income and capital gains taxes on investment earnings used for college. In addition, some states match that tax-free treatment on gains, and also provide income-tax deductions on 529 contributions. (The federal government does not.)
Tax exemption on investment gains make 529s a top choice in saving for young children, as earnings have many years to compound. In a big account the kind sufficient to fund four years at a private college or university the tax savings can total many thousands of dollars.
But if the beneficiary is already in college, or soon to start, there's little time to compound. Is there any reason, then, to use a 529 at this stage?
The first would be to get that state income tax deduction on contributions. A majority of states offer some type of deduction. Even if the savings went into a money market account yielding almost nothing, a donor in a high-tax state such as New York could realize substantial tax savings on contributions.