Best way to save for college in 5 years? 529? 401K..?

Question

Question about how to save for College?

We have a 13 year old son, and we want to start saving something as he will be entering college in 5 years...what is the best way to go about it this late in the game, what is the best investment for my money....I have less than 100.00 a month to invest a month. Would it be better to invest the money in my personal 401K Plan and draw it out in 5 years, or to invest in a 529 plan? Please note...we are older parents, and my husband will be elgible for retirement in 5 years as he will be 66....

Answer 1

I use the 529 plans - you can use any of the state sponsored plans - doesn't have to be your state.  The investments are after taxes, but the returns are all tax free as long as it is used for higher education.  Plus, anyone can contribute into them - my kids grandparents put some money in.

Answer 2

Many states offer a tax deduction for contributions to the state's 529 plan.  If you aren't getting an employer match on your 401k, the tax deduction (if available in your state) makes the 529 plan hard to beat.

Ideally, of course, you would use the increased amount of your state tax refund to add to your son's 529 the following year.

Answer 3

You do NOT want to invest for college five years hence in a retirement account like a 401(k).  529 plans are one possibility - plain old savings like a money-market fund is another.  I would stay away from the stock market because of your short time horizon.

Answer 4

I'm going against the grain here....I say use the 401k.  Your child may not want to go to college.  If it's in your 401k you've added to your retirement and avoided any messy beneficiary or owner changes.  Second, the fees in the 529 plan will likely be higher as they all include sales commisions and such.  Third, since you're older you'll be able to withdraw without penalty so it's effectively a pre-tax savings account.  Yes, the earnings will be taxed but since you're saving for a relatively short period of time those earnings will be minimal.   In both cases the contributions will be taxed...may as well postpone them if you can.

As for others being able to contribute?  They can do the same thing....you'll just have to be the intermediary.  Have them gift the money to you.  You then change your 401k deferral to 100% for as long as it takes your pay to match the gift amount.  You then use that gift money to live off and they've essentially contributed to your 401k.  This blows up if your child doesn't go to college of course but again you can always take that inservice withdrawal and re-pay the money.  There will be double taxation (they paid taxes initially and you'll pay upon distribution) but same would hold true if he didn't go and you were using the 529 plan.

Answer 5

A 529 plan is simply one of many ways offered by our lovely IRS that allows us to invest and save for college needs tax free. So why is this so neat or any different than simply deducting educational expenses when you incur them? True, you can deduct (currentlythe IRS allows qualifying taxpayers to deduct $2,000 - $4,000 of qualifying tuition expenses) the expenses from your taxes down the road, or hope you don’t make too much to qualify for a tax credit. But, why miss out on the opportunity to have compound interest working for your investments. Of course, you must use the money for college needs or pay a 10% fine and the taxes you would have had to anyways. Now understand, there are two different ways to use this plan, invest on your own or “lock-in” rates with particular schools. Here is a summary below of the two different ways to use this plan. In addition, here is the SEC on 529s.