Question: My son is starting his first year of college this fall. We’ve been saving for years in a 529 plan and have about two years saved so far in the 2020 Lifecycle Fund.
We recently paid off our mortgage, so we have more money to save for school. Since the time has come for us to start paying for college and we’re worried about market swings, should we continue to save in the 529 Lifecycle Fund, or do we put it into a savings account?
Ric: I wouldn’t bother adding money to the 529 plan unless you get a state tax deduction for doing so. Not every state offers a tax benefit, but some do. If your state does, you can put the maximum allowed into the 529, but choose the money market option, which is similar to a bank account. You won’t have to worry about market fluctuation, but you’ll still get the state tax break.
529 plans allow you to save for college and take advantage of tax-free growth. That’s fabulous when you have five, 10, 15 years to save. But if you’ve got less than two years, you don’t have enough time to take advantage of compounding growth. The only real reason to save in the 529 then becomes the state tax break. That’s a small amount of money because it’s a state tax deduction – not a federal tax deduction.
Neither Edelman Financial Engines, a division of Financial Engines Advisors L.L.C., nor its affiliates offer tax or legal advice. Interested parties are strongly encouraged to seek advice from qualified tax and/or legal experts regarding the best options for your particular circumstances.