Note to newsletter subscribers: The Personal and Retirement newsletters will be merging. Starting Dec. 16, I’ll be producing one newsletter a week, which will be delivered to your inbox on Mondays. I’ll continue to write about general personal finance issues, but with a greater emphasis on retirement planning for all ages.

I was looking at my kid’s 529 plan and realized it needed an infusion of cash.

My son, who has autism, will end up spending an extra year in college. He’s been struggling a bit, so we decided it was best that he not stress about finishing his degree in four years. This means boosting his college savings beyond what we had initially planned.

I share this because often parents of high school students and children already in college ask me whether it is still worth it to put money in a 529 college savings plan. It is, but more on this later.

Here are some basics about 529 plans.

There are two ways you can put money into a 529 plan. A prepaid tuition plan allows you to lock in the cost of an in-state school. The idea is that you get tomorrow’s tuition at today’s prices. But be mindful that you’ll also need to save for room and board and other education expenses not covered in a prepaid tuition contract. Additionally, be aware that with prepaid tuition plans if your child chooses to attend an out-of-state school, you may have to make up any difference in tuition prices.

The second way to put money into a 529 is the more popular investment plan. This type of account operates much like a Roth IRA. You invest with after-tax money and select how you want the funds invested. For our three children, my husband and I chose “age-based” portfolios, which are invested based on the date your child will begin using the funds for higher education. The younger the child, the more aggressive the investment options may be. As your child gets closer to attending college, the money is gradually moved to more conservative investments.

There’s a common misconception about 529 plans, which is that the student is limited to going to an in-state college. Although the plans are state-sponsored, money invested in a 529 can be used for qualified expenses at any public or private institution, regardless of where you set up the account or where the beneficiary attends school.

Money withdrawn from a 529 account is free from federal tax (and, in most cases, free from state and local taxes, as well) when used for qualifying college costs. Many states offer tax deductions for residents who make contributions to a 529 plan.

The state tax break is the primary reason we continue to fund 529 plans for our children, two of whom are currently in college. Because they are in school, we invest conservatively to limit our risk so the gains are small. But the state tax break makes it worth contributing to the 529 plans.

Now, about the question of how late is too late to fund a 529 plan. I asked Madeline Hume, a Morningstar manager research analyst, to address the issue. By the way, Morningstar, which provides independent investment research, recently released its latest rankings of the best and worst of the nation’s largest 529 college-savings plans, which represent about 97 percent of the more than $319 billion in 529 plan assets.

Q: Is it ever too late to fund a 529 plan?

Hume: No, middle and high school isn’t too late to open a 529 account. Children stand to benefit from having a 529 account opened in their name, regardless of when it’s opened. Granted, the financial benefits may be fewer, but psychological benefits still persist: According to the Washington University in St. Louis’s Center for Social Development, even children with small — less than $500 — savings accounts that are dedicated to college like a 529 account are more than three times more likely to enroll in college than their peers without any dedicated savings. They’re also more than 4½ times more likely to graduate. College savers may also benefit from opening a 529 plan, even if they get off to a late start. About 46 percent of Americans live in a state that offers a state-specific income-tax benefit for contributions to a 529 plan, and college savers can use that benefit each year that they contribute to a 529 plan, which may ease their tax burden.

For those who did get off to a late start and want as much time for their assets to grow as possible, there are ways to delay the beginning of withdrawals. There’s a common misconception that 529 plan assets have to be used for undergraduate education, but that’s not the case.

Investors can withdraw money from a 529 plan, tax-free, for graduate education in addition to undergraduate. So if a child is seriously considering graduate school, parents can give their kids’ savings more time to grow by financing undergraduate education through other means. College savers can also change the name of the beneficiary on the account and use that money toward another child.

Q: Any suggestions on how to invest in a 529 plan for older children?

Hume: There is no one perfect solution for college savers, and this is especially true for those who start late. While age-based portfolios are still a viable option and might be the proper choice for most investors that want to “set it and forget it,” others may want to take more or less risk than what the age-based portfolios offer. For these investors, 529 plans also offer static portfolios. As the name implies, static portfolios stay the same over time unless you adjust them. They may include stock funds, bond funds, money market funds or some combination of the above.

Static portfolios are best suited for those who want to deviate from the standard age-based portfolio, and understand how their willingness and ability to take risks is different from the norm.

In a recent blog post, Hume and Margaret Giles, a data reporter for Morningstar, showed how even one year can make a significant difference. Morningstar found that the average college saver doesn’t open a 529 account until their beneficiary is over 7 years old.

“College savers who start investing in 529 plans later miss out on the equity-heavy portfolios with the most growth potential,” they wrote. “While stocks are certainly more volatile than bonds, they have greater return potential over the long run. To make matters worse, college savers who invest late into a 529 plan also miss out on the benefits of compounding returns as their investment horizon shortens. College savers may be tempted to make up for lost time by making large contributions or taking on additional risk in their portfolios, but it is hard to make up for years of missed compounding, underscoring the virtue of saving for college as soon as possible.

So, when it comes to saving in a 529 plan, it’s never too late but better sooner than later.

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Live Chat

Please join me today at noon (Eastern time) for a live discussion about your money. My guest will be Anthony ONeal, author of “Debt-Free Degree,” last month’s Color of Money Book Club pick.

I’m live every Thursday from noon to 1 p.m.

Best holiday gifts

Last week, I asked: What’s the best present you’ve ever received that didn’t come from a store?

Lloyd Davis from Flower Mound, Tex., wrote about a gift his wife received. She’s a baker and her aunt compiled a book of recipes used by his wife’s grandmother. “The recipes are still used many years later. I have trouble recalling what I got from, or gave to someone just a year or two later. The recipes were warmly received, and continue to be appreciated.”

“When I was about 10 years old, my grandmother knitted me a wool stocking hat — double layered and plenty long enough to cover the forehead and ears,” wrote Herb Taylor of Freeport, Maine. “I’m now 70, and I still wear that hat, especially when I’m blowing snow or hiking with my dog. My grandmother didn’t have much money, but she had a lot of love, and the good sense to give gifts that were useful and would remain so for years to come.”

“As I write this, I have tears in my eyes,” said Lorna Gilkey of Alexandria, Va. “The best present not from a store I received was from my sister Patricia. For Christmas 1999, she gave all of us individual cassette tapes with Stevie Wonder’s’ song “These Three Words” on it. The song speaks on how a sincere ‘I love you’ is the most powerful gift we can give to one another. A few other family members said she was being cheap; I saw her heart in the gift and cherished it. She died two months later. Twenty years later, I still appreciate and cherish that gift.”

“My husband, Elliott, received the kidney of a young man who had been killed in an automobile accident,” wrote Babs Waters from Alexandria, Va. “That priceless gift received ten years ago, has allowed my husband to lead a very productive life in service to others, and has bonded us to an amazing family in another part of the country, who is also blessed by the fact that their late son’s organ has given a new lease on life to another. The best gifts are always from the heart.”

Color of Money Columns This Week

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