MONEY Ask the Expert

Why It Pays to Spend Down Your College Savings Plan Quickly

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q. I have enough in my daughter’s 529 to pay her full tuition for freshman year. Should I? — Andrea B., Location withheld

A. Yes, it’s best to use the savings sooner rather than later, says Raymond Loewe, an adviser with United Planners Financial Services. Given that your time horizon is short and the stock market has had a good run, it’s best to realize those tax-free gains now. Plus, spending down the 529 early could improve your odds for financial aid in future years, albeit slightly. Every $100 used can be worth $6 in aid, says Loewe. One caveat: The IRS won’t let you snag an education tax credit and take the 529 tax break for the same expenses. So to get the full $2,500 American Opportunity credit, for example, you’ll want to pay at least $4,000 with other money, says Joe Hurley of Savingforcollege.com.

More on college savings:

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser