The COVID-19 crisis has been battering the U.S. economy ever since cases of the virus started multiplying in early March. Not only has the stock market been on a roller coaster ride, but millions of Americans have been forced into unemployment as social distancing mandates shuttered businesses, made certain jobs unsafe, and left countless parents without child care.
Mental health experts have said that the best way to get through the crisis is to take things day by day, week by week. But what about the long-term goals you may be focused on? Should objectives like college savings fall by the wayside as you grapple with your current reality?
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Of course, if your income has taken a drastic hit in the past few weeks, or has gone away completely, then funding any sort of savings plan is probably out of the question right now. But what if you still have a job, albeit a much less secure one? Or what if you're just plain worried about the impact COVID-19 might have on your finances two, three, or six months down the line? Should you keep funneling money into your 529 college savings account in the hopes of covering your kids' education? Or should you allocate more of your money to near-term savings?
The 529 dilemma
Saving in a 529 plan is an efficient way to fund a college degree. Though there's no federal tax break for contributing to a 529, once funded, your money in that account gets to grow tax-free, and withdrawals are tax-free provided they're used for education purposes.
Like retirement plans, 529s are invested for added growth. When the stock market experiences a bout of volatility, their value can decline. Thankfully, 529s are based on the target date model, which shifts your investments toward lower-risk holdings as your children's anticipated college start dates arrive. If your kids are younger, you may notice a sizable (though, hopefully, temporary) dip in your account balance. If your children are older, you may not see quite the same extreme impact.
But balances aside, if you've been steadily funding your 529, you may feel pressured to keep doing so. If your kids are approaching college age and you only have so much time to pad that account, you may worry that stopping now will set you back once those tuition bills start coming due. And if your kids are younger, you may fear that by pausing contributions, you'll lose out on years of growth.
So what's the solution? As is the case with funding a retirement plan, your near-term financial needs should take priority over all other goals. Therefore, if you're worried about covering your upcoming bills, are concerned about job security, or don't have a solid emergency fund, then holding off on your 529 plan contributions is a smart thing to do. Will you possibly have to tweak your kids' college plans because of that? Well, it depends on how many months' worth of contributions you withhold. But is your near-term financial security worth that sacrifice? Absolutely.
It's noble to want to put your children through college, but right now, that goal may need to go on the back-burner as we grapple with the ongoing crisis. And difficult as it may be to make that decision, you should let yourself be at peace with it. Remember, it's possible to borrow money for college, but if you run out of money to pay your bills and have to borrow in credit card form to pay for basics, your finances could get hurt irreparably. And no college degree is worth that kind of hit.
