Pay for education by early withdrawal from 401k, not an Education 529 Plan
With both 401k and Education saving Plans, all growth is tax-deferred.
Proceeds from a Education Plan used to pay educational expenses are exempt from federal taxes. But 401k contributions are made in pre-tax dollars while Education Plans have to be funded with after-tax dollars.
Most parents will be in a better position to help their kids with college costs by maximizing their 401k and then taking a early withdrawal for their 401k plan to pay for Education expenses. Although 401k Plans have been around for three decades, the average 401k Plan only has a balance for those retiring at age 65 of only $47,000.
Tax information convinces parents into believing they need separate dedicated savings for their children’s education fund. For example if they have $14,000 for retirement and education, most parent put $10,000 into the 401k and $4,000 in a Education 529 Plan.
If the parents contribute all $14,000 to the 401k Plan for the next 18 years They will take full advantage of the employer’s match of 25 cents on the dollar — a guaranteed 25% return on your money, plus a minimum of $10,800 tax saving.
When college comes along, take a early withdrawal from the 401k loan to pay the education expenses is tax-free. You’ll have 60 months to repay each early withdrawal back and you pay interest to yourself.