Categories
Money

Why a 529 Savings Plan is Superior

This is an article demonstrating the benefit of the 529 savings plan compared against other potential choices for your child’s college savings.

Having a newborn, I recently began investigating options for saving money for the kid’s college fund. Of course, there are many options, including (but not entirely inclusive) investing directly yourself, UGMA/UTMA, and the 529 plan.

I think the natural choice arises when you begin with the right set of questions. E.g., “Is your kid going to turn into a twat at 18” or “How do you think your kid will handle having a sudden influx of money?” Not that this is directly correlated, but more than 50% of NBA and NFL players experience bankruptcy or financial duress post retirement – leading me to believe that if you don’t have a good handle on how to use money and debt, a sudden influx of money isn’t going to fix that.

Of the options I mentioned, only the “investing directly yourself” and the 529 plan allow you to be in control at all times of the account (including how you handle distributions). With UGMA/UTMA, the kid inherits all of the money at the moment they turn 18 and can spend it all on baseball cards if they so desired. And of the”investing directly yourself” and the 529 plan, only the latter is tax-advantaged.

With a 529 plan, when applying for financial aid, it’s more advantageous since it is counted much less so towards total expected family contribution. Additionally, you’re able to transfer the beneficiary to other people (including yourself) if there’s unused money. Really, I’m not seeing any downsides here with the 529 plan.

In short, even though we hope our kids don’t turn out to be financially irresponsible, they might anyway due to inexperience. We need to remember that we’ve had the hard lessons already, in addition to years on them, and they haven’t had the chance to learn these things on their own. We want to help our kids through college but let’s not give them enough rope to hang themselves.

Personally, I’m not going to tell my kid(s) about the 529’s existence and have them work under the mode that they better do well in school now to attain merit scholarships. And when they ask for residual money not covered by scholarships for additional school material, I’ll just tell them “Ugh. I’ll dig in my wallet and see what I can come up” when I’m really digging into their 529.

Note that when I reference the 529 plan, I’m referring to the self-directed investing (instead of say, locking in a state tuition rate). Of all the 529 plans I saw, I ended up going with Vanguard (the 529 plan being “based” in Nevada), since Vanguard funds had the lowest expenses I’ve seen out of all the plans.

Leave a Reply

Your email address will not be published. Required fields are marked *