Why Raiding Your Kids' 529 College Savings Plan Is a Bad Idea
Life + Money

Why Raiding Your Kids' 529 College Savings Plan Is a Bad Idea


Cringe-worthy as it is to dip into your kid's piggy bank, it's probably the nicer financial move compared to raiding his or her 529 college savings account.

Nearly half of parents with college savings for their children have withdrawn some of the balance in the past two years, according to new data from T. Rowe Price, which surveyed 1,086 parents with children ages 8 to 14. Of the 282 who had taken money from their child's college savings, just 18 percent used at least some of the funds to pay for their kids' education — and only 3 percent used the money solely for education.

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The rest, as you can see in the chart above, spent college savings to cover a range of expenses from monthly bills and other debts to discretionary purchases including vacations and weddings.

That's short-sighted.

"It's one thing [to take out the money] if the child didn't go to college and is never going to go to college, or if they went to college and there's money left over," said Mark Kantrowitz, vice president of strategy for Cappex.com, a college and scholarship search site.

Even then it may be a smarter financial move to keep the money invested for a sibling, a parent's future educational needs or even a grandchild's education. But if you expect your child will go to college, taking out the money for other spending just hurts your ability to cover that cost down the line.

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"Your greatest asset is time," said Kantrowitz. "So if you take out the money early on, and you're telling yourself you're going to put the money back in, you've reduced the amount of time for the money to compound."

Some of parents' bad behavior may stem from misconceptions about college savings accounts. In the T. Rowe Price survey, 42 percent of parents mistakenly believe that they lose any money left in a 529 if their child doesn't go to college or if there is money left over after their child graduates. Another 21 percent erroneously believe there's no penalty to withdrawing 529 funds for purposes other than education.

Tapping college savings for non-education expenses won't leave you with as much money as you'd think. You'll owe federal taxes and a 10 percent penalty on the earnings portion of withdrawals and may also owe state taxes if you'd previously claimed a deduction or credit for those contributions.

The exception: If your child receives a scholarship, you can withdraw funds equal to that without paying a penalty. But you'll still owe taxes on the earnings.

This article originally appeared on CNBC. Read more from CNBC:

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