|
 She and her husband Mark were about $40,000 in debt, and were having
trouble paying their monthly bills. As recent homebuyers, the couple
from Syracuse, New York, were already underwater on the mortgage and
getting by on one income as Lauren focused on being a stay-at-home
mom.
"We were in a really bad financial position, and just didn't have
the money to make ends meet," remembers Greutman, now 33 and a mom
of four.
There was one pot of money just sitting there: Their son's college
savings, about $6,500 at the time. That is when they had to make a
decision that no parent ever wants to make.
"We had to pull money out of the account, in order to keep the
electricity on and pay the water bill," she says. "We thought long
and hard about it and felt almost dishonest. But it was either leave
it in there, or pay the mortgage and be able to eat."
It is a moral quandary faced by parents in dire financial straits:
Treat your kids' college savings - often housed in so-called 529
plans - as a sacred lockbox, or as a ready source of funds that may
be tapped when necessary.
Precise figures are not available, since those making 529-plan
withdrawals do not have to notify administrators whether the funds
are being used for qualified higher education expenses, according to
the College Savings Plans Network. That is a matter between the
account owner and the Internal Revenue Service.
TIAA-CREF, which administrates many 529 plans for states, estimates
that between 10 percent to 20 percent of plan withdrawals are
non-qualified and not being used for their intended purpose of
covering educational expenses.
It is never a first option to draw college money down early, of
course. Private four-year colleges cost an average $30,094 in
tuition and fees for 2013/14, according to the College Board. Since
that number will presumably rise much more once your toddler
graduates from high school, parents need to be stocking those
financial cupboards rather than emptying them out.
Joe Hurley, the so-called "529 Guru" and founder of
Savingforcollege.com, has a message for stressed-out parents: Don't
beat yourselves up about it.
"The plans were designed to give account owners flexible access to
their funds," Hurley says. "I imagine parents would feel some guilt.
But I don't think they should. After all, it is their money."
PENALTIES ON EARNINGS
Keep in mind, though, that there are often significant financial
penalties involved. Lauren Greutman managed to avoid them, since at
that time she was using a simple savings account to stash her son's
college funds.
[to top of second column] |
With 529 plans, though, it is another story. With non-qualified
distributions, in most cases you are looking at a 10 percent penalty
on earnings. Withdrawn earnings will also be treated as income on
your tax return, and if you took a state tax deduction on the
original money, withdrawn contributions often count as income as
well.
Not ideal, of course. But if your other option for emergency funds
is to raid your own retirement accounts, tapping college savings is
a last-ditch avenue to consider. Not only because you do not want to
blow up your own nest egg but because it could make relative tax
sense. As the saying goes, you can borrow money for college, but not
for retirement.
"If you think about it, a parent who has a choice between tapping
the 529 and tapping a retirement account might be better off tapping
the 529," says James Kinney, a planner with Financial Pathway
Advisors in Bridgewater, New Jersey.
If the account is comprised of 30 percent earnings, then only 30
percent would be subject to tax and penalty, Kinney explains. And
that compares favorably to a premature distribution from a 401(k) or
IRA, where 100 percent of the distribution will be subject to tax
plus penalty.
Lauren Greutman's story has a happy ending. She and her husband made
a pledge at the time to restock their son's college savings as soon
as they were financially able. It is a pledge they kept: Now 8 years
old, their son has a healthy $12,000 growing in his account.
She even runs a site about budgeting and frugal living at
iamthatlady.com. Still, the wrenching decision to tap college
savings certainly was not easy - especially since other family
members had contributed to that account as well.
"We tried to take emotion out of it, even though we felt so bad,"
Greutman says. "Since we didn't have money for groceries at that
point, we knew our family would understand."
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance;
Editing by Lauren Young and Lisa Shumaker)
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