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- It’s never too early to start thinking about saving for college, and a 529 plan can help with that.
- However, I only contribute a small amount to my daughter’s plan each month.
- A 529 plan is great for saving on taxes, but the lack of flexibility makes it less valuable to me.
College education comes at a high price, which means it’s never too early for families to consider saving for this potential expense.
My daughter turns 3 this fall. She had a 529 plan since she was just a few weeks old. We contribute some money to her plan, but there are other ways we are planning for her future – educationally and otherwise – beyond that.
As a financial planner, here’s how I think about college savings and what we do to plan in my family.
529 plans are useful for a specific purpose
529 plans were created for a very specific purpose: as college savings vehicles that rewarded savers with tax advantages.
Your contributions can grow tax-free in a 529 plan. Distributions from the accounts are also tax-free, as long as the money goes toward qualified education expenses.
The SECURE 2.0 Act also allows 529 account holders to do Roth IRA rollovers. This is a fantastic benefit that can give families the opportunity to diversify the taxability of accounts for a 529 plan beneficiary in the future.
529 plans sound like a great deal, because they are! I recommend that almost all of my financial planning clients open these plans for their children.
And yet, my wife and I only contribute about $400 a month to our daughter’s 529 plan. That would put us far short of our college funding goal … if it was the only way we were going to financially plan for her future.
Major drawback of college savings plans
The feature that makes 529 plans great also contains their main limitation: You get tax benefits only if you use the money for qualified education expenses. You may be subject to taxes and penalties if you take money out of a 529 plan and spend it on anything else.
If flexibility and choice are top financial priorities, you need tools other than a 529 plan at your disposal—tools that allow you to grow your wealth for any purpose, not just educational purposes.
Saving and investing for maximum flexibility
Me and my wife I DO save and invest more money in our daughter’s name. We simply contribute as much of what we can save to a joint taxable investment account in both of our names.
Based on our current overall savings rate, we can pay for college out of pocket by the time our daughter starts her freshman year without relying on her 529 plan.
Or we can pay for whatever other purpose we need to fund based on what actually happens in our lives over the next 15 years. The only constant in life is change, so flexibility and choice are extremely important to us.
By investing heavily in our investment account, we are laying the groundwork to support ourselves (down the road, in retirement) and our daughter (for whatever ITS individual goals may be 15 to 20 years from now), whether traditional college is in her future or not.
It is important to enjoy life even today
We want to maximize our whole family’s financial flexibility in the future, which means we prioritize contributions to our taxable investment account above all else – even though doing so means giving up some advantages tax along the way.
It is also very important for our family to enjoy life together tODAY. Maintaining our savings rate target is our top priority; spending on the experiences we value in the present is second.
That means we’ll choose to spend $500 on the ballet class our daughter is obsessed with instead of putting that $500 into her 529 plan. If there’s extra available to put into a 529 plan after our other expenses, that’s great, but it’s icing on the cake and not a requirement for us.
This is also the strategy I tend to recommend to our wealth management clients: Yes, open and fund a 529 plan and reap all its benefits. (This includes giving other family members, such as grandparents, a specific place to contribute directly to a child’s education if that is important to them.)
But also save and invest aggressively in a taxable investment account so you have the financial resources you’ll need in the future to finance whatever life may look like down the road—and don’t miss out on all-important experiences with your family today for the sake of putting a little more into the college fund.