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Q: I have recently won $30,000. I am torn between putting the money in my boys’ 529 college fund or paying off our house. My youngest is 4, and, if I gave it all to his college fund, he would be set. I could then concentrate on my 8 year old. Should I split it—or do my house first?  All our other debt is under control.

Happily confused in Pennsylvania
 

 A: Should you reduce current expenses by paying off your mortgage, or invest now for your children’s college education? You’re in an enviable position. Many people would take $30,000 and blow it. Or they are over their heads in credit-card debt and need the funds to reduce their current credit obligations.

            Here's my advice: Check first with your accountant to see how much you will owe in income taxes on the $30,000. Put that amount in a money market account, so that the money will be there when the taxes are due next spring.

            Then, I would take the rest if the money and put it into a 529 State-Sponsored College Plan. If you pay off your mortgage, you’ll lose your current tax deduction of the interest you pay to your lender. By investing for your child’s education, you get a future tax benefit—and you keep your current tax advantage. The funds that you put into the 529 Plan are not tax-deductible, but earnings grow tax-free, and, with the passage of the 2001 Federal tax law, withdrawals to pay for tuition or college expenses are tax-free.  In some states, residents can get tax breaks on their state income tax, if they use their state’s 529 plan.

            If you invest in a Section 529 plan, you won’t have to scramble around for funds when the time comes for your child to go to college. Section 529 plans can be set up for the benefit of any child or adult. These plans are established by individual states, which hire money managers to invest the funds.  Most states allow non-residents to invest in their plans, and the future student is not restricted to colleges in any specific states.

            Currently, assets in these savings plans will not have a major impact on financial aid.  The money in these plans is treated as a “parental” asset.  However, Congress might make changes.  If the assets in these plans are considered the child’s, eligibility for financial aid will be reduced.  

            Funds not used by the beneficiary by age 30 can be transferred to benefit another family member. You might split the funds between your two children, since there is only a four-year difference in age. Funds left in the older child’s account can be transferred to the younger child.    

            One downside: You can’t control the investment of your contributions.  The money manager hired by that state makes the investment decisions. But they tend to be more aggressive in investing your money if your child is young

            Make sure you understand how these plans work before you set one up. There are numerous Web sites, including www.collegesavings.org,  www.salliemae.com, and www.sensible-investor.com, which provide useful information. You can also call the Department of Education (or Department of Higher Education) in the state where you live. 

            You would also benefit by meeting with a financial adviser, before you make your move. But, all in all, continuing a current tax deduction and investing for tax-free withdrawals in the future sounds like a win-win situation to me.  Good luck!

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Financial planner Elizabeth Lewin answered this question. She is the co-author of the recently published book, “Family Finance” (DearbornTrade).  She is also the author of “Your Personal Financial Fitness Program,”  “Financial Fitness for Living Together,” and “Kiss the Rat Race Good-bye.”  Elizabeth has written articles for many magazines, and she has appeared on numerous national radio and television talk shows. She is a contributing editor to MAKING BREAD.

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