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Break into the 529?

Chris Farrell Oct 6, 2010

Question: Thinking about closing my 529 Savings that has about $8500 in it right now. I put $50 a month. My thoughts were the same as one of the questions I read on your page… about if the girls get into academy school or something that they won’t need the 529. I would rather put this money in tsp retirement and watch it grow. Is it worth withdrawing now and paying the penalty? Kerry, Honolulu, HI

Answer: You should take care of your retirement first. The reason is that as we age our earnings and savings opportunities shrink. But when your children graduate from college they’ll have a lifetime of earnings ahead of them. This is why it often makes sense when money is tight for parents to save for their retirement and their children to plan on borrowing for college.

Okay, but we still want to help out our students as much as possible. So, why not stop the $50 a month into the 529 and put that money instead into your retirement plan? But I wouldn’t take the money out of the 529. Don’t pay the taxes and penalty. Leave it alone.

After all, you don’t know what choices or opportunities your children may face when they’re of college age. They might not need the money. But then again they might. This way you keep some college-dedicated money aside, but increase your contributions to your retirement plan.

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