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Ask Money

Time for a 529 college savings plan

Chris Farrell May 4, 2011

Question: I’m not sure if my wife and I are putting our money in the right place. We currently save $600 a month for retirement in Roth IRAs, but nothing for our two kids’ college accounts. We both work for the state and have pensions to look forward to, so I’m wondering if we should reduce our Roth contributions and direct them to 529 college savings plans. From what I understand, Roth’s are taxed now and we get tax-free withdrawals later while 529s are NEVER taxed (but the money can only be used on education). Jake, Madison, WI

Answer: Uncle Sam always gets a cut (well, almost always).

The dollars you put into a 529 college savings plan are after-tax dollars. It’s just like a Roth in that respect. But you’re right that the earnings from your 529 can be withdrawn tax free so long as the money is spent on qualified education expenses, such as tuition.

The top priority is taking care of your retirement. Your children will have a lifetime of earnings ahead of them after they get their college diploma.

Still, it’s a good idea if you can afford it to set aside some money to help defray their college expenses. A 529 is a tax savvy way to do it. So, if you would like to save some money for their college years, by all means cut back some on the Roth contributions and put the money into a 529.

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