Stop Saving for your Children’s College Education Until You Max Out Your 401(k).

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Starting a separate account to save for your children's education is not always wise, says Paul J. Mauro, CLU, ChFc, founder and managing partner of Legacy Financial Advisors headquartered in Milford, MA. "Instead of starting a special account such as a 529 Plan, max out your 401(k) contributions and then borrow from your plan to pay your kids' college bills," advises Mauro.

"Stop saving for your children’s college education…unless you max out on your 401(k)," Paul J. Mauro, CLU, ChFc, told the 35-year-old parents of a newborn daughter who wanted to start a state-sponsored 529 Plan to pay for her tuition.

Mauro is founder and managing partner of Legacy Financial Advisors, Inc. ( headquartered in Milford, Mass., with offices throughout the East Coast. He explains, "They love their child and should plan ahead for college expenses, but as the old hunting saying goes, ‘You can’t chase two rabbits.’"

Mauro believes most couples will be better positioned to help their kids with college costs by maximizing their 401(k) Plan assets and then borrowing from the plan to pay tuition and living expenses.

Says Mauro, who founded his firm over 30 years ago, "Few workers appreciate the value of their 401(k) benefit," noting that, "although these plans have been around for three decades, the average 401(k) Plan balance for those retiring at age 65 is only $ 49,000."

Retirement and Education Too

With both 401(k) and 529 Plans, all growth is tax-deferred and not subject to creditors or inclusion in financial aid calculations, should you need to apply for assistance. Proceeds from a 529 Plan used to pay educational expenses are exempt from Federal taxes, and these plans do have a place under the right circumstances. But 401(k) contributions are made in pre-tax dollars while 529 Plans have to be funded with after-tax dollars, only about 65 cents for every dollar you earn.

Explains Mauro, "Eighteen years from now, when college comes along, the proceeds borrowed from your 401(k) Plan to pay the tuition are tax-free. You’ll have 60 months to repay each loan and you pay interest to yourself. Interest is generally bad unless of course you are paying yourself then interest is good."

The Young Couple

Says Mauro, "This young professional couple expects to work hard in their corporate careers, earn a substantial income, educate their children and then retire at a reasonable age. Financial misinformation in magazines and investment company ads seduced them into believing they needed separate dedicated savings for their children’s education fund."

Emphasizes Mauro, "The problem: they were not maxing out the $14,000 they could be socking away in their 401k Plan. They were instead putting $9,000 into the 401(k) and thought they should put another $5,000 away yearly for the baby in a 529 Plan."

Mauro urged the couple, "Contribute all $14,000 to the 401(k) Plan for the next 18 years. This will achieve three big benefits. Since the 401(k) deposits are pre tax the real cost in cash flow is just about $10,000 net, while 529 Plans contributions are paid in after tax dollars. Maxing out on your 401(k) will also take full advantage of the employer’s match of 25 cents on the dollar — a guaranteed 25% return on your money."

Mauro noted, "What’s more, when the children are grown, chances are earnings will be higher or both spouses will be working full time, making it much easier financially than when they were starting a family."

Legacy Financial Advisors Inc. has extensive experience in helping families plan for the issues of aging. Featured in the PBS special "and Thou Shalt Honor" broadcast in November 2004 on WGBH, Mauro will be seen again on PBS in April when the rebroadcast occurs. With 30 years of experience in the area of planning for aging, Legacy has extensively used the new products and plans developed which are referred to as "Principal Protected Investing" recommended in the Ernst and Young LLP in a recent white paper on the changing face of the industry recently. Legacy Financial Advisors Inc. has 6 offices in Massachusetts; Milford, Duxbury, Yarmouthport, Natick, Peabody, and Braintree and offices throughout New England and along the East Coast.

This information is for educational purposes only. Before you buy, sell, or act on any of this information, please meet with a financial advisor about your specific situation. Past performance is no guarantee of future results. Read the prospectus before you invest in any security. All information is gathered from sources believed to be accurate, however we do not warrant or guarantee its accuracy.


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Dick Pirozzolo