529s Offer Benefits for Older Students Too

Worried that you don’t have a 529 account as college expenses approach? The good news is that families of high school students or older can still utilize a 529’s federal and state tax benefits, even if college is fast approaching. Any amount of college savings now will reduce future student loan debt.

The assumption here is straightforward: If your current savings aren’t enough to fully cover your child’s college expenses, putting more money aside will be necessary. In that case, a 529 plan remains one of the most tax-efficient ways to prepare for those costs, even on a short timeline.

Tax Efficiency Over Taxable Accounts

Even if you only plan to hold the funds for a short period, using a 529 plan can result in more money available for college. That’s because income earned in a 529 account is exempt from federal income tax.

In contrast, interest earned from parking your savings in a taxable bank CD or money market fund could be taxed at over 30% annually, depending on your bracket. These taxes eat into the money you have available when tuition is due.

In addition to federal tax benefits, 529 plans offer an important advantage when applying for federal financial aid. Qualified 529 withdrawals are not counted as student income on the FAFSA (Free Application for Federal Student Aid), making them a smarter choice than some taxable accounts in this context.

Parental 529 assets are only counted as 5.64% available to be used for college expenses, equivalent to mutual funds and other taxable savings accounts.

State Tax Breaks Add More Value

There’s also a compelling state-level incentive. Currently, residents of 34 states and the District of Columbia are eligible for a state tax deduction or credit when contributing to a 529 plan.

In most of these states, funds are not required to remain in the account for a set period, so families can receive an immediate tax benefit each year, even when the student is already enrolled in college.

This effectively provides a guaranteed return on your contribution just for using the 529 as an account to pay college expenses. Four states (Michigan, Montana, Minnesota, and Wisconsin) currently block this loophole, so please be sure to check your state’s current rules.

Flexible Use For Other Children

Another advantage of 529 plans is their flexibility. If your contributions to your oldest child’s 529 plan result in more funds than needed, the account’s beneficiary can be changed to a sibling.

Alternatively, funds can be transferred to another child’s existing 529 account, with no tax consequences when the new beneficiary is a family member in the same generation.

Gift Tax Exclusions are also a benefit

If you make larger contributions as college nears, 529s offer beneficial gift tax exclusion rules. Each parent can contribute up to $19,000 per child per year (as of 2025), or a combined $38,000 if filing jointly, without incurring gift taxes.

The IRS also allows a special five-year election that lets you front-load up to five years of contributions — a total of $95,000 per parent ($190,000 per couple), per beneficiary.

Importantly, moving funds between 529 accounts of children in the same generation does not count as a new gift and won’t trigger gift tax consequences.

Summary: Opening a 529 now still provides great value

In short, while 529 plans are often associated with long-term savings for young children, their benefits don’t disappear once they enter college. With strategic planning, families can continue to use these tax-advantaged accounts to reduce the cost of higher education, even when time is short. Take the first step towards saving more today!