529 Plan and College Savings

Question: I am trying to decide if I should start a 529 plan or if I should contribute more to a 401k?

Should I start a 529 or have my wife open a 401k so we can take out of the 401k for college when my child goes? What are the tax advantages for for both and which is the better choice. What happens if I do a 529 and my child doesn’t go to school or doesn’t need all the money or gets a scholorship?

Answer: The 529 plan provides far better tax advantages for education. The money coming out of the 529 can be used for any “education” expenses. If your child needs to pay for housing, a computer, a car for school, etc… it is all qualified for your 529 plan to use the money completly tax free. A 401k will always have a tax penelty if you take money out before retirement. If you don’t use all the money in the 529, you can take it out and just pay the taxes on the money like regular income.

Secure Employee Retirement Plans – Jim McCarthy