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529s aren’t always the best way to save for college

Sep 26, 2011 | | Comments Comments Off

Dear Liz: I am returning to college in my later years for a second degree. Can I save in a 529 plan for my own college use in two years?

Answer: You can, but why would you want to?

The big benefit to a 529 plan is that your returns can grow tax-free. That’s a boon for parents in higher tax brackets contributing for young children, since their money has years to grow and they can put at least some of their cash into riskier assets, such as stocks.

If you need the money within two years, though, it should be in a cash account that won’t earn much. (The average money market fund pays around 0.02% right now.) You wouldn’t be getting any real growth, so the tax benefit of a 529 plan is minuscule. What you would get are restrictions on how you use the money and possible complications for your tax returns. If you want to use education tax credits, for example, you won’t be able to apply those on expenses you’ve paid with a 529 withdrawal.

A simple FDIC-insured savings account — perhaps at an online bank that pays around 1% — is probably the better way to go.

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Categories : College, College Savings, Q&A