College Savings v. Retirement Savings

college_fundAn astute reader pointed out some qualifications to my Friday post on 529 college savings accounts – specifically, reasons not to fund them.  The most compelling reason, coincidentally covered in the next day’s New York Times, is that funding your 529 accounts is not as important as funding your 401K retirement account.

The New York Times article, which is worth reading in full, makes the following correct argument: If you have to choose between fully funding your 401K vs. funding your child’s 529 education account, fund the 401K account first.

The first reason for this is that many people can borrow money to fund a college education, but we will have a harder time borrowing to fund our retirement.  Another reason is that the income tax advantages available by funding a 401K – available to everyone subject to federal income taxes – are far greater than the potential state income tax advantages of a 529 account.  In addition, 529 account generally do not trigger employer matches the way many 401K plans can.

In sum, all my big tough talk about funding one’s 529 account only applies after you’ve fully maximized your 401K plan contributions.



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