Should I Use a 529 Plan to Pay Off Debt?
Sean's oldest son is 6, and he and his wife have a 529 plan with $18,000 in it. Should he and his wife use that money to pay off their credit card debt?
QUESTION: Sean in San Antonio and his wife have $25,000 in credit card debt, $2,500 in medical debts, and $89,000 each in student loans. They make about $100,000 a year. Sean’s oldest son is 6, and they have a 529 plan with $18,000 in it. Should he and his wife use that money to pay off the credit card debt?
ANSWER: No, because you’re going to get destroyed with penalties when you pull that out of there. Once you put money in a 529, if you take it out and use it for anything other than college, you get hammered.
You stopped adding to it, but anything that the account has gained will be taxed at your tax rate plus a 20% penalty on a 529. It’s even worse than taking it out of retirement.
No, I wouldn’t take it out of the 529 because I do think—I don’t know how much of that is growth and how much is principal—but I think you’re going to get penalized pretty heavily. The other thing is you have this weird feeling like you took money from your kid or something. It’s technically your money. You put it in there, but when you put it in the 529, you did put it into your kid’s name. And the thing is, it doesn’t solve your problem. You’ve got such big problems that are much bigger than this little $18,000 account. If it really moved the needle in your situation, maybe we’d think about it again and really look into it in detail.
I’d leave it alone, but I would quit adding to it, and I would quit adding to any kind of retirement and I would get on the debt snowball and I would get on a written budget and I would look for extra jobs. And you need to get your income up another $50,000 with extra jobs tutoring or whatever else you can do with those master’s degrees because you have $200,000 in debt making $100,000. It’s going to take you a good hard five years if you get after it starting right now.