NEW YORK --- Your child is in high school. Is it too late to start a 529 college savings plan?
The reluctance to dive in so late in the game is understandable, given the stock market swoons in the past two years. You might worry about not recovering from any turbulence in time.
As with retirement funds, however, there are 529 options for investors of every stripe. That means that even if your child is just a few years away from college, there could still be reason to open an account. If your child is a college freshman, you could sock money away for the final years of schooling.
For the uninitiated, 529 plans encourage families to save by letting them withdraw proceeds tax-free for college, including tuition, books and room and board. Each state offers its own plans, but generally you can pick one from any state. Some states offer perks for selecting a plan from home.
If you're thinking about opening an account, here's what to consider.
Many states offer financial incentives for 529 plan contributions. So you can still reap benefits, even if the money won't be in an account for long.
In Pennsylvania, you can deduct up to $13,000 in contributions from taxable income if you invest in the state's program. That alone could save a couple hundred dollars in the year you make contributions.
Given the short time horizon, consider fund options within the 529 plan that protect your contributions. These may be called "principal protection," ''stable value" or "guaranteed option" funds. The returns may not be as high, but they'll still likely beat current CD rates, notes Peter Mazareas, the vice chairman of College Savings Foundation, which tracks the industry.
TIAA-CREF, for example, promises a minimum annual interest rate of 1 percent to 3 percent on its guaranteed option fund in Georgia. As with any 529 plan, distributions are tax free.
Some states also offer matching contributions for lower-income families. A Kansas plan, for example, matches up to $600 a year for households that earn less than twice the federal poverty level. For a family of four, that means income would have to be below about $44,100 to qualify.
Most states offer fund options designed to limit risk based on a child's age. These funds spread assets over a mix of stocks, bonds and short-term investments or money market accounts. As the child grows older, a larger share of the funds are automatically shifted out of stock and into more stable investments.
For example, Vanguard's age-based plans for high school juniors allocate a maximum of 25 percent stocks for aggressive investors. Moderate and conservative plans for the same age have no stock exposure.
"The analogy is very similar to retirement funds -- you should be more aggressive the more time you have," said Mr. Mazareas, of the College Savings Foundation.
As with any mutual fund, there are inherent risks with 529 plans. So even with age-based plans, there's no guarantee you'll have a set dollar amount by the time your child is ready for college. The blend of stocks and bonds also varies by firm, so be sure you know the specific mix of the plan you're considering.
To get a sense of how plans with different asset mixes fared during the recent market swings, consider a Vanguard plan that is fixed at 50 percent stock. If you put $10,000 into the fund on Sept. 30, 2007, before the market began its descent, it would be worth $9,768 as of Nov. 30. That's assuming there were no additional contributions.
Compare that to a Vanguard plan that was 25 percent stock; that $10,000 contribution would be worth $10,720 as of Nov. 30. In a plan with no stock exposure, it'd be worth $11,385.
If your child is already in high school, minimizing fees should be a priority. It's one reason to avoid adviser-sold plans, which usually charge commissions of 5 percent to 6 percent of the contribution. For a $10,000 contribution, that's $500 to $600.
"If you're going to pull the money out in year or two, it doesn't make sense to pay that," said John Heywood, who heads the 529 business at Vanguard.
Families tend to go with adviser-sold plans if they're already working with a broker. Others simply prefer making financial decisions with professional guidance. But if you're comfortable picking a plan on your own, you can get a direct-sold plan from the state plan's Web site or the investment firm that handles it.
To start researching, go to www.SavingForCollege.com, which gives quarterly updates ranking the top performing plans. The site also monitors fees for direct-sold plans; its latest study found Ohio, Kansas and Illinois have some of the lowest-cost options. You can also compare plans by features such as matching contributions and enrollment fees.
A common concern is that building a sizable 529 account will hurt your child's ability to win financial aid. But as long as the plan is in a parent's name (with the child as a beneficiary), the impact should be minimal when applying for aid.
Only a small percentage of parents' savings are assessed in aid formulas.
If you put the 529 in a grandparent's or other relative's name, there's no impact on aid applications.
Another worry is that your child will decide not to attend college. One option in that scenario is to change the beneficiary of the plan to a younger sibling, future grandchildren or even yourself. If you ultimately need to tap your 529 for reasons other than college, the earnings will be taxable at your ordinary income rate plus a 10 percent penalty rate.
All told, there are myriad factors to consider when opening a 529 plan -- not just a child's age. If you decide it's right for you, you can start estimating how much you need to save each month at www.SallieMae.com/invest.