529 Plans vs. Retirement Accounts: Which Should You Tap for College Expenses?
Making the decision to use a 529 plan or retirement account requires a thoughtful look at your family’s financial priorities.
Hello Discerning Parents and Future Graduates,
Today, we delve into another essential chapter in our guide to mastering the financial maze of funding higher education. For all the Jills and Jacks navigating the delicate balance of funding their children's education without jeopardizing their own retirement dreams, this one's for you.
Your child’s college tuition bill has arrived, and you're wondering: should you dip into that shiny 529 account, or is it time to crack open the retirement nest egg? Let’s weigh the options before you make a move that could haunt your financial future.
The Case for 529 Plans
Why Choose a 529 Plan for College?
Funds grow tax-free if used for qualified education expenses.
Flexible uses: tuition, room, board, books, and even laptops.
Can be transferred to another beneficiary within the family if unused.
Downside of 529 Plans:
Withdrawals for non-qualified expenses incur taxes and a 10% penalty on earnings.
State-specific plans may have limited investment options.
When to Use a 529 Plan:
When you’ve saved intentionally for college and the funds align with anticipated expenses.
If you’re maximizing tax advantages and know the child will use the funds for education.
Pro Tip: Always check your state’s specific 529 plan rules. Some states even offer tax deductions for contributions! Visit Saving for College for a breakdown of qualified expenses and state-specific benefits.
Can Retirement Accounts Play a Role in College Expenses?
Options for Retirement Accounts:
Traditional IRAs: Withdraw penalty-free (but not tax-free) for qualified education expenses.
Roth IRAs: Contributions can be withdrawn tax- and penalty-free at any time; earnings are penalty-free for qualified education expenses but subject to income tax.
401(k)s: Borrowing from or withdrawing funds should be a last resort.
Advantages of Using Retirement Accounts:
Flexibility if you haven’t saved enough in a 529.
Roth IRA contributions act as a dual-purpose savings tool for retirement and college.
Risks of Using Retirement Accounts:
Using retirement funds may impact your long-term financial health more than you realize.
Roth IRA distributions can reduce financial aid eligibility if timed poorly.
How to Decide?
Key Questions to Ask:
Are your 529 savings sufficient for current college expenses?
Can you afford to pull from retirement savings without jeopardizing your financial future?
Have you explored alternative funding sources like scholarships, part-time work, or student loans?
General Rule of Thumb:
Use 529 plans first for college expenses since they’re designed specifically for that purpose.
Tap into Roth IRA funds only if you have surplus savings in the account or need to fill a gap.
Avoid dipping into Traditional IRAs or 401(k)s unless it’s an absolute emergency.
Pro Tip: Keep retirement savings on track with consistent contributions while addressing college costs.
Financial Aid Considerations
529 Plan funds owned by parents have a minimal impact on financial aid calculations (assessed at up to 5.64%).
Retirement accounts don’t count as assets for FAFSA but distributions do count as income, potentially reducing financial aid eligibility.
Making the decision to use a 529 plan or retirement account requires a thoughtful look at your family’s financial priorities. While a 529 plan is often the smarter choice for college expenses, retirement accounts can act as a backup option in specific situations.
Ready to create a game plan for balancing college and retirement savings? Schedule a Getting Acquainted Call with me today! Together, we’ll help you make the right moves for your family’s future.
Warm regards,
Julie Bray
Your Family's College and Retirement Champion
GW Financial, Inc.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by GW Financial, Inc. to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 GW Financial, Inc.