The case for 529 college savings plans

I've written a fair amount here and in our money newsletter about the tradeoff between saving for your own retirement vs. a child's college education. Generally I've come down on the side of making retirement Priority #1, both for your sake and the kid's.

A new survey from Sallie Mae and Gallup shows that many Americans are doing just that. According to the survey, 27 percent of parents with college-bound kids said they were saving the most for retirement, while barely half that number (14 percent) said they were saving the most for education.

So far, so good. However, there was a more alarming side to the survey. Only 62 percent of the parents said they were saving for college at all. Even 20 percent of those with household incomes of $100,000 or more weren't saving anything.

Lots of families are simply struggling to make ends meet these days, of course. And some relatively high earners may figure they'll just pay those college bills out of current income when the day comes.

However I suspect a big reason is that 529 plans, probably the best savings vehicle for college, are still a mystery to many people. For example, some people may not know that if their children don't go to college or need the money to pay for it they can change the beneficiary to another family member. You can even use it for your own education, which could be helpful if you're planning to go back to school and study for a new career in retirement. And if all else fails, you can simply take your money out of the plan, although you'll face taxes and penalties.

Provisions like those, plus the tax deferral (much like an IRA), and the income-tax break offered by many states can make 529 plans an attractive proposition—even for those whose first priority is (and should be) saving for retirement.

For more about 529 plans and how they work, visit CollegeSavings.org. Or see this advice from the Consumer Reports Money Lab. —Greg Daugherty

Greg writes the "Retirement Guy" column each month in the Consumer Reports Money Adviser newsletter.