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!
You'll need to sign in or create an account to connect with an expert.
The 529 plan is explicitly for education expenses and is the best choice for education savings.
@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a simple conservative mutual fund, you would only pay tax on the capital gains and dividends, not the entire amount withdrawn.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/
Still have questions?
Make a postAsk questions and learn more about your taxes and finances.
emmel650
Level 3
FoxyLoxy
Level 2
NateHo
New Member
ccthealias
Level 2
wardlem
Returning Member
Did the information on this page answer your question?
You have clicked a link to a site outside of the TurboTax Community. By clicking "Continue", you will leave the Community and be taken to that site instead.