5 Reasons to Skip Saving for College in a 529 Account
Are you making a mistake with a 529 account?
If you are worried about paying your kid's college tuition someone may have suggested investing in a 529 account. Are you not sure what a 529 plan is? Check out this description from the U.S. Securities and Exchanges Commission.
But 529 accounts aren't for everyone. In fact, there are five good reasons to avoid opening a 529 college savings account for your child.
Your Retirement Savings Are Low
Starting a 529 account for your child's higher education appears to be an act of a responsible parent. But the truth is the biggest favor you can do your offspring is to plan for your retirement. Your children can always take out a student loan, but nobody will lend you money for your old age.
Have you planned your monthly budget in retirement? Are you regularly saving enough to meet those needs? That should be your first priority. Your children will thank you when they don't have to support you in retirement.
With the average 401(k) balance well under $100,000—and life expectancies climbing—many people should be putting away more money for their golden years.
You're Eligible for a Roth IRA
If you qualify for a Roth individual retirement account, consider opening one before you think about a 529 account. The primary tax advantages are the same—you deposit after-tax money and enjoy tax-free growth in the account.
You can make withdrawals from a Roth IRA without a penalty for higher education expenses. If you've reached age 59 1/2, which is true of many college students' parents, you also avoid paying taxes on any growth.
Moreover, a Roth IRA doesn't count against your child when it comes to financial aid calculations. The same can't be said of a 529 account, which is typically counted against you as a parental asset.
As a bonus, if your child doesn't use all the money in your Roth IRA for college, you have an extra cushion for retirement!
Your Children Are Teenagers
The primary tax benefit of a 529 account is that your money builds tax-free. But if your child is about to enter college, your savings don't have that much time to grow.
Moreover, when your child is on the verge of higher education, you probably should put your college savings into safe, low-growth investments so you'll have the money when the tuition bill arrives. The fees and restrictions associated with a 529 account likely outweigh any tax benefit on such minimal income growth.
On the other hand, if your kids are babies, a 529 account might make sense because you have more time for growth.
You're Likely to Qualify for Aid
One of the hardest questions for parents to answer is whether they'll qualify for financial aid. Many middle-income families will get some support, but they'll have to pay for a good chunk of tuition and expenses.
Still, if you're on the low end of the income spectrum, you're likely to qualify for financial aid, and a 529 account will count against you in the aid calculation.
This is a good time to circle back to the top of this list and ask yourself if you're prepared for retirement. Channel your impulse to save in that direction before starting a college savings account.
Your Child Isn't Going to College
We all want our children to succeed personally and professionally. But some people simply aren't inclined toward higher education.
If you have a baby, it may be hard to tell. By the time your child is a teenager, you can probably judge whether she's college-bound.
Don't delude yourself. If your child is unlikely to earn a degree after high school, there are better places for your money than a 529 account.
Edited by Elizabeth McGrory