Sunday, January 20, 2013

Have Kids and Contribute to a 529? Read this before you make your next contribution!

For those of you who have kids, you may have established a 529 College Savings Account for junior to go to college.  You probably think you're doing the right thing by saving for junior.  You're certainly not doing a bad thing.  BUT, you may not be doing what's in your best interest.  As this Forbes article from a few years ago mentions, colleges will take into account a parent's ability to contribute toward their student by including 529 account assets, but will exclude 401K/IRA (Both Roth and non-Roth).

So what to do?  Of course it depends on your situation, such as gross income, adjusted gross income, how many kids you have, if you're already maxing out your 401K/Roth IRA, your age, your children's age, etc.

What do I recommend, I'd recommend saving toward a Roth IRA and Roth 401K first, ESPECIALLY if your company offers a match to what you save up to a certain percentage.  I've heard stories where companies offer a 5% match, and people don't even contribute 5% of their salary toward their 401K.  That's like leaving 5% of your salary on the table or passing on a raise.  Pay yourself first; there are always potentially scholarships, financial aid, work-study, part-time jobs,sports scholarships, and other mechanisms to go to college and graduate school.  There are also programs such as loan forgiveness that may make it a better deal to have your kids take out loans and then later have them forgiven.

Be strategic about how you save, spend and borrow to put kids through college and you may save yourself thousands of dollars over the long run.