(The writer is a Reuters contributor. The opinions expressed
are his own.)
By Chris Taylor
NEW YORK, July 23 Lauren Greutman felt sick.
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
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
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
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.
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 here;
Editing by Lauren Young and Lisa Shumaker)