Should I Set Up a 529 College Savings Plan for My Child?

Should I Set Up a 529 College Savings Plan for My Child?

It was early on a Tuesday morning. June 21st. My birthday.

My wife had a gift for me and told me I had to open it before I went to work. I told her it’s ok, I’ll just open it with the other gifts after I get home from work. She looked at me and said, “no Scott, open this gift now!” So I said ok. As I opened the gift it appeared to be a gym shirt inside but as I pulled it out it was a long sleeve shirt for a little baby.

This was how my wife let me know last year that she was pregnant!

I was so excited but completely freaked out at the same time. 

When I found out my wife was pregnant, I decided I was going to work an extra 3 hours a week until my son was born so I could put money towards his future education. By the time he was born, we had about $1,200 saved up. 

I opened an investment account with Wealthsimple and the funds were invested in a low-cost index fund. I wanted to keep it in an account where I could access the money because I didn’t know if my son was going to want to go to college. What if he says no to college and just wants to be an entrepreneur? I didn’t want all my money tied up in a 529 college savings because I had heard once you put the money in you can’t take it out unless it’s for that child’s qualified higher education expenses.

This is probably the biggest reason most parents don’t start a college fund for their kids. Because the future is unpredictable. 

The Benefits of a Tax-Advantaged 529 College Savings Plan

As I started looking deeper into the benefits of a 529 College Savings Plan a few months ago, I realized it’s an excellent option for parents to save for their child’s education. So I decided to create an account and transfer the funds, here’s why:

  • The money that you contribute grows tax-free. So you can contribute money to the fund before you pay taxes on it. 
  • When you use those funds to pay for qualified higher education expenses you can withdraw all funds tax-free. Higher education expenses include things like tuition, books and supplies, room and board, and even things like a laptop computer.
  • You get double tax savings!
  • Most plans allow you to ‘set it and forget it’ with automatic investments that link to your bank account or payroll deduction plans.
  • 529 plans have no income limits, age limits or annual contribution limits.

How Can I Predict the Future?

What if your kid doesn’t want to go to college? This is a perfectly normal concern for a lot of parents. Here are a few options:

  • Transfer the money to another child. Any funds that go unused for your first kid can be used for the next child
  • You could transfer those funds to another relative. Even a grandkid in the far-out future
  • You could use the funds for yourself if you ever decided to continue your education
  • Lastly, (this is the one that changed my mind) if you decide not to use the funds for education you can withdraw your original contributions at any time for any reason. But, if you withdraw investment gains then you would be subject to a 10% penalty. For example, if I contribute $5,000 and it grows to $7,000 over 18 years, I can withdraw the $5,000 for any reason that I want but the $2,000 I would have to pay a penalty on. 

How To Apply: 

Look into what your state has to offer but keep in mind that you’re not just limited to your state. 

I did some research into the best state tax-advantaged 529 college savings plans and learned that my home state has one of the best in the country with the lowest fees. Even though I live in Texas now I decided to open up mine through the state of Utah. 

One of the other reasons I decided to open up a 529 plan through my home state is I discovered that the funds can be invested in a Vanguard low-cost index fund. So for me, tax advantages and super low costs of investments makes it worth it for me and my kids financial future. 

Have you decided to start a 529 plan for your child’s future? Why or why not?

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