If your child gets a scholarship and
won’t need the funds in the account, you have three options: • You can save the money within the account for later expenses, such as graduate school;
• You can transfer the account to a differ- ent beneficiary, or;
• You can withdraw the money penalty- free up to the amount of the scholar- ship. You still pay taxes, but you don’t have the 10% penalty, it becomes a tax-deferred account rather than a tax- free account.
If you have an emergency and need the funds for something besides education expenses, you can withdraw as much as you need at any time, but you will pay tax and penalties on the earnings portion of the distribution.
There are several grants available for Maine residents if you invest in the state’s 529 plan, known as NextGen, which is run by the Finance Authority of Maine. • A $500 initial grant for all babies born in Maine starting in 2013; or $200 for older children to open a new account.
• An 50% matching grant on all contri- butions, up to a limit of $300 per year.
• A one-time $100 grant for setting up automatic contributions to the ac- count.
Balancing college and retirement It’s important to make retirement
savings your priority. At the very least, contribute enough to maximize any em- ployer match. Keep in mind that because 401(k) contributions are made with pre-tax money, adding to your 401(k) doesn’t reduce your paycheck dollar-for-dollar. For every $100 you contribute, it might reduce your paycheck by only $70 or so, depend- ing on your tax bracket. As your income increases, you can incrementally increase your 401(k) contribution. For example, if you get a 3% raise, consider increasing your 401(k) contribution by 1%. You’ll still see an increase in your take-home pay, and that tiny amount will make a big difference in your account once you need it in twenty or thirty years.
Once you’re saving 10-15% of your income, including any employer match for retirement, you can start seriously saving for college. Set up a 529 plan for each child as soon as you can manage it, and try to put in a small amount of money each
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month, hopefully enough to maximize the grants available. It may not add up to a lot at first, but you can always increase it as your income increases. Save as much as you can for college without jeopardizing your own retirement.
What if I have debt as well? How to handle debt depends on the
situation. If it’s high interest debt, you might want to aggressively pay it down be- fore you start saving for college, but think hard before sacrificing your retirement sav- ings to pay down debt. It may make sense to do so if the debt can be repaid quickly, within a few months, but you don’t want to lose five or ten years of retirement savings. That will have a serious impact on your ac- counts when you need them in retirement. Low interest debt (like mortgages) should not be prepaid unless you have extra mon- ey and really want to be debt free. If you’re maxing out your 401(k) and putting lots of money away for college, then you might consider paying down your mortgage.
The main thing in thinking about your
family’s financial future is to have a plan, so that you’re exercising some control over your choices and you have a sense of how the future will look for your family. If you’re thinking about it now, you’re on your way to getting there, and you’re a step ahead of many parents.
Allison V. Bishop, CPA, is a personal finance coach in Portland, Maine with 18 years experience as a CPA. She seeks to help her clients make conscious decisions around their money in order to reach their financial goals. Her website is
allisonbishop.com. See ad on page 15.
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