529 Plan and College Savings

Archive for the ‘529 Plans’ Category

Question: 401(k) penalty worth it?

I am looking to start an Educational 529 IRA or some sort of high interest tax-deferred savings account for my 3 year old daughter and 1 month old son. My employer matches us 50 cents on the dollar up to a maximum of 6% of our annual earnings. Based on this they will give me $1320 of free money every year if I contribute 6% of my income which is $2640.

Now my question is this – Would it be wise for me to contribute MORE than the 6% since the money I’m putting into the 401(k) is “before tax” earnings and use this as the “savings” method for my children’s education? I know I will be penalized for pulling some of it out in 15 years when my daughter 18yrs old and ready for college but is the penalty fee worth it considering how much interest I might earn in the 401(k) as opposed to putting it into a 529 IRA for her?

Also, is the 529 IRA pre-tax money that I am putting in and does my employer put it in straight from my paycheck before my paycheck is taxed?

Thank you

Answer: The fee for pulling money out of your 401(k) is NOT worth it. In most cases, you would want to contribute the maximum you can that will be matched in a 401(k). In your case it would be the 6%. After that you probably want to contribute to a 529 Plan for the education of your children. If you are still looking to make some tax deferred retirement contributions, the next step wuld be a IRA. If you max your IRA contribution, then you go back to your 401(k) and start increasing the contribution rate there.

The Utah Educational Savings Plan (UESP) – FDIC-insured commercial