When is it a Bad idea to Open a 529 Account?

Dear 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 to having a 529 account would be if your state offers a tax deduction or tax credit on contributions to a Section 529 plan. Most states offering this type of tax break require you to contribute to your home state's plan, although some states offer a deduction for contributions to any 529 plan. Some states also have a one- or multi-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 also varies by state.

I don't know how much you plan to help out, but the annual exclusion for gift taxes in 2014 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, though it may drastically impact her financial aid package if she's attending school for more than one year.

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.

Good luck.

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