If I expect to pay tuition in the coming years - s...
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If I expect to pay tuition in the coming years - should I keep contributing to a 401k or open a 529 account or do nothing?

What's the most logical way to pay for college tuition if you expect to pay it in the coming years? Is it best to withdrawal from 401k account? Or open a 529 account? Or do nothing? Or something else? 

 

Thanks!

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If I expect to pay tuition in the coming years - should I keep contributing to a 401k or open a 529 account or do nothing?

The 529 plan is explicitly for education expenses and is the best choice for education savings. 

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Level 15

If I expect to pay tuition in the coming years - should I keep contributing to a 401k or open a 529 account or do nothing?


@sum_student wrote:

What's the most logical way to pay for college tuition if you expect to pay it in the coming years? Is it best to withdrawal from 401k account? Or open a 529 account? Or do nothing? Or something else? 

 

Thanks!


With a simple conservative mutual fund, you would only pay tax on the capital gains and dividends, not the entire amount withdrawn.  So from that as a baseline, you are only really looking for a return that is similar or better than a mutual fund, where you pay less tax on the growth than the 15% capital gains rate, so that's basically only EE savings bonds or a 529 account, or tax-free municipal bonds. 

 

You can't withdraw any money from a 401(k) if you are still employed by the sponsoring employer, unless they offer hardship withdrawals (they are not required to allow this) and your situation meets the definition of a hardship.  And if you did, you would be putting money in tax-free but withdrawing it paying full income tax (15%. 22% or higher) plus a 10% penalty.  (The penalty exception for qualified education expenses applies to IRAs, not 401(k)s, they are different plans under different parts of the tax code and different rules, even though they have some similarities.)

 

EE savings bonds used to be a useful strategy but the interest rate is crap these days.

 

 

Only the 529 plan is explicitly geared toward education expenses, but there are some limitations and rules you need to follow, especially if you are saving for someone else. 

https://www.nerdwallet.com/blog/investing/529-plan-rules/

 

*Answers are correct to the best of my ability but do not constitute legal or tax advice.*
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