Reply to Pay off home equity loan or contribute to college savings

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[quote=Anonymous][quote=Anonymous]

OP here - this sounds interesting. Answer to question 1 - yes, 2 - no, 3 - I don't know but can find out. So you're suggesting putting as much as possible in the 401k's and then borrowing from that for college? Why is that different from investing in a 529? [/quote]

There are two times at which 401k loans can work in your favor.

1) You are not contributing to your yearly maximum limit because you need to save money for other purposes. In this case save that money to your 401k and loan it out to yourselves when you need it. This preserves your yearly contribution space.

2)You've socked away a lot of money in your 401k, but the investment options contained therein suck due to high management fees or even loads. What do do? Take out a pile and invest it somewhere else- Vanguard 529s, Fidelity Spartan Funds, your next house purchase, etc.

These options are only to be taken if you are confident enough in your monthly cashflow that you will be able to pay your monthly payments no matter what, otherwise you'll be hit with taxes and a 10% penalty. Only borrow as much as you can repay or, in situation 2, as much as you can repay without dropping pretax contributions. Only invest in things that show immediate return (debt payment, debt avoidance) or that you intend on keeping until retirement (Mutual Funds, house, etc), and make sure your asset allocation remains to plan.[/quote]

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