Retirement savings should take priority over college savings. With college, you have some flexibility with financing, but you can’t borrow money for retirement.


To have a good chance at a comfortable retirement, it is important to fully fund your 401k/403b and Roth IRA before funding a 529 plan to save for a child’s college education.  However, after maximizing tax-deferred savings plans for retirement, the 529 plan is actually a pretty good backup retirement savings plan.  This is true even if you don’t end up having to pay college tuition for kids.


The money going into a 529 is post-tax but the assets grow tax-free and may be withdrawn tax-free.  In some states, the contribution is also tax-deductible.  Each person can contribute up to $15,000 per year.  A couple can double that contribution.  There is also an option called “superfunding,” which allows 5 years worth of contributions ($75k/$150k) at one time, as long as no further deposits are made for 5 years.

Don’t Fear the 10% Penalty

What if you would rather use the 529 account for purposes other than funding college education (like retirement expenses)?  No problem!  While a withdrawal for purposes other than education expenses is taxed as income and assessed a 10% penalty, you shouldn’t be deterred as the tax-deferred growth outweighs the penalty over time.

Yes, Even Your Mother-in-Law

As the account grows tax-deferred, you can switch beneficiaries at any time.  Here is a list of qualified beneficiaries:

  • Son or daughter or descendant of son or daughter
  • Stepson or stepdaughter
  • Brother, sister, stepbrother, stepsister
  • Mother or father or parent of mother or father
  • Stepmother or stepfather
  • Son or daughter of brother or sister
  • Brother or sister of mother or father
  • Spouse of any individual listed above
  • First cousin of beneficiary
  • Brother-in-law, sister-in-law, son-in-law, daughter-in-law, father-in-law, mother-in-law

The Stealth 529 Retirement Plan

529 Plan:

  • Initial deposit: $75k
  • Investment returns: 5%
  • Years: 30
  • Retirement Income Tax Rate: 20%
  • Penalty 10%
  • After-tax distribution: $254k

Taxable Account:

  • Initial deposit: $75k
  • Investment returns: 5%
  • Years: 30
  • Capital Gain Tax Rate: 20%
  • Penalty: 0%
  • After-tax distribution: $165k

Of course, the assumptions in this calculation depend upon future tax rates and the sequence of future investment returns.

In conclusion, don’t let the 10% withdrawal penalty scare you from using the 529 as a stealth retirement plan.  Once your tax-sheltered retirement plans are fully funded in any given year, there is no downside to establishing a 529 plan even if you never have a college-bound child.

Choosing a 529 Plan

Many states have state-specific 529 plans.  However, residents are not limited to investing in their own state’s plan.  Another state may offer a plan that performs better and has lower fees.  If there is no tax break offered for an in-state plan, then shop for plans from other states.  The plan chosen does not affect which state the student enrolls in.  An investor can live in NJ, invest in a plan from UT, and send a student to college in FL…or even pay a retiree’s rent in AZ.

Currently, the best plans for people who do not qualify for state tax-deductions are Vanguard’s 529 Plan (based in Nevada), New York’s College Savings Program, and Utah’s Education Savings Plan.  They have low fees and solid investment options.  Some 529 plans have very high fees that eat up much of the potential benefit.  Avoid those plans like the plague.