Q: My husband and I have approximately $14,000 in a few Roth and traditional IRAs that are currently held at a large investment firm.

I believe we are paying them too much money in fees each year and we are small potatoes to them. We each save 10 percent in our 401(k) retirement plans at work, and have no credit card debt.

Do you think it would be a good idea to take all of this money and open up a 529 plan for our 2 1/2 year old daughter?

A: I think you’re on the verge of making a big mistake.

If you start closing traditional IRAs (which are pre-tax dollars) and moving them to a 529 plan, you’ll have to pay taxes and the penalty (because you’re younger than 59 1/2) on the cash. That’s one way to wipe out your retirement fund.

You won’t pay taxes on the contributions to your Roth IRA, but you will pay taxes and penalties on any earnings if you switch the funds to a 529 plan. On the other hand, you can withdraw contributions and earnings from your Roth IRA tax and penalty free if you use it to pay for college tuition, medical bills, or a down payment on a first home.

And, why would you want to put the funds into the 529 plan where you have fewer investment options? 529 college savings plans are age-based, for the most part. They invest based on your child’s age, not your financial circumstances. With IRAs and Roth IRAs, you have control over your own investment strategy.

Here’s another consideration: When it comes time to apply for financial aid, the 529 plan cash will be counted toward what you can contribute. But, retirement accounts are exempt. While you will have the option of using funds from the Roth IRA for your child’s tuition, no will force you to do so. But a 529 plan requires you to use the funds, or put them toward another child’s tuition if your daughter doesn’t wind up going to college.

While I really like 529 plans, they aren’t a substitute for retirement accounts, and they don’t have many of the benefits.

If you’re worried about fees, you should think about consolidating your traditional IRAs into one account. Then, you should only pay one fee or you can consider transferring your account to a different, but reputable, company with a lower fee structure.

As for being “small potatoes,” my own gardening experience over the years has shown that potatoes multiply pretty quickly under the right circumstances. If you invest in an S&P 500 index fund, and it grows over 30 years at 8 percent per year, and you continue to contribute $3,000 per year, your $14,000 will be worth more than $480,000. (Check out the match at money.cnn.com.)

I don’t know any investment firm that considers a half millions dollars “small potatoes.”

Published: Oct 1, 2004