If your kid gets a scholarship, you should get his 529 plan

If your kid gets a scholarship, you should get his 529 planIf your child doesn't need his 529 plan savings, your retirement account probably does.(Photo: iStockphoto)Dear Pete,My only child just received a full-ride scholarship to the school of his dreams. My wife and I are beyond thrilled, but believe it or not we’re in the midst of a giant disagreement over the aftermath. We saved very aggressively for his college education, at the expense of our own retirement accounts. My wife, after talking to some of her girlfriends, believes we should give the money we saved to our son as some sort of reward. I think we should find a way to transfer that money out of the 529 plan and into our retirement savings, because as of now, we’re not even close to the amount of money we should have for retirement, primarily because we chose our son’s education over our own retirement. Who’s right? — Stephen, OmahaDear Stephen: We don’t have to say someone is right and someone is wrong, do we? You are both just expressing an opinion. I happen to agree with you, but that doesn’t mean your wife is wrong. Stephen, I’ve been married for 16 years — there’s no reason to ever prove your wife wrong. There’s simply no upside to that.Remember, you sacrificed and contributed to his 529 plan because you wanted his college education funded. Well, it’s funded. Mission accomplished. Let’s say that on the way home from a meeting, I stop and get my family a pizza for dinner. But upon arriving home, I learn they have already eaten, but I haven’t. Am I supposed to just give them the pizza anyway and sit there and watch them not eat it? Of course not. Sustenance was the goal, the goal was achieved, now give me some pizza.USA TODAY'Launch' plan gets your grown kid off your couch in 3 stepsI can’t imagine a scenario in which giving your son tens of thousands, if not hundreds of thousands, of dollars right now when he doesn’t need it, makes any sense. Especially given the fact that you need it, it’s yours, and he is still getting his education. I understand he earned the scholarship, but it’s not like you didn’t have a role in the process. You nurtured his gifts, you encouraged his studies and activities, and you obviously led by example in holding education in a high regard. You had a gigantic role in his scholarship award.Peter Dunn, aka Pete the Planner, writes a weekly financial-planning column for The Indianapolis Star and Fox59. (Photo: Provided)The number of parents who believe their child is going to earn a full-ride scholarship is greatly disproportionate from those parents’ children who actually receive one. You did the right thing by saving for your son’s education. However, I would argue that it generally makes more sense to aggressively fund retirement rather than a college education, primarily because there is a means to finance a college education via loans, whereas there are no means to borrow for retirement. You dodged a bullet. You may actually get to have your cake and eat it too. Had he not earned the scholarship, there would be no cake for you.Fortunately, you won’t be subject to any penalties when you withdraw the 529 money. Earning a scholarship creates an exception to the 10% penalty rule on non-qualified withdrawals. You will still need to pay taxes on the earnings on the account, but you’ve already paid taxes on the contributions, so you’re in the clear there.Some parents choose to try and fund their children’s education via Roth IRAs, just in case the student ends up not needing the money for college. A Roth IRA can be used to pay for a college education, but no penalty is incurred when it isn’t used for college. I don’t necessarily recommend solely using the Roth IRA method because of the relatively low contribution limits, the income limits, and the lack of state tax benefits compared with many state 529 plans. From what I’ve seen, not needing the money you’ve saved for your kids’ education is exceptionally rare. Preparing for that possibility is prudent, but not always worth the hassle.USA TODAYPete the Planner: Think your finances are tough now? Just waitHere’s the good news, Stephen, your son’s scholarship is about to jumpstart your retirement-preparation strategy. You can turn your cash flow’s focus toward retirement, and you can reassign the focus of the college fund to retirement. Talk with your tax adviser about the best tax-advantaged way to accomplish this.Congrats. Your family’s focus on education may have just accidentally saved your retirement.Peter Dunn is an author, speaker and radio host. While he has promoted Indiana’s 529 plan, his relationship does not affect the advice he gives. Have a question about money for Pete the Planner? Email him at [email protected]

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