529 College Savings Plans for a Minor Child

For the last couple weeks, we’ve been discussing savings vehicles for the children in your life. Today we're going to continue our deep dive into my 5 favorite ways to save for minors with a look at 529 College Savings Plan.  There are so many things about college that can be scary for both students and parents, but how to pay for it shouldn't be one of them.  Today we'll go over some of the ways you can use a 529 college savings plan to help lighten the load, a few tips on how to get a better education for less, and how you can set up a college savings account for your family to use for generations to come. Let's get started!

What is a 529 Plan?

A 529 is a great way that parents and grandparents can start saving for college before your child even knows what they want to be when they grow up.  A beneficiary of the plan must be named when the plan is established, but if you don't have kids yet, you can just name yourself and change the beneficiary later on. 

The money in a 529 savings plan grows tax-free, forever, and there are no contribution limits, so unlike a Roth IRA that must be earned income by the participant, you can help save for your kids' future in a 529 by pumping money into the account as fast as you want.  There is a gift tax limit extension up to 5 times in one deposit, so if you had a parent pass away and you inherited a nice sum of money, you can put up to $75,000 in the 529 in one shot.  State laws vary, so it's important to check your state's plan before you do this.

As long as you use the money for qualifying educational expenses, you'll never pay a fee to get the money back out, and you can change the beneficiary at any time if you have multiple children, or your kids are finished with it and your niece is the next child in the family headed to college.  Transfers to family members' 529 plans are also allowed, so you can start with one bucket, and split it into several buckets when your kids are ready to head off to school.

What About Financial Aid?

Some people are worried that by saving money, they are disqualifying themselves for some financial aid that might otherwise be available, but the percentage of the 529 that truly affects financial aid eligibility is so small, it's much better to have money in the bank than to bet on getting a needs-based scholarship and have nothing saved up in case you don't get it. 

Your financial planner can help you navigate this tightrope to put you in the right place for the best possible scenario.  I will add here that it is absolutely worth paying for a financial planner to draft a specific college savings plan for you.  You might pay upwards of $2,500 for such a document, but the benefit you'll get out of having that expert in your corner could save you tens of thousands of dollars per child! 

Picking a School

We were discussing college savings plans with another financial planner just yesterday, and he brought up such a good point that I'd like to share with you.  The top tier schools, the ivy leagues, and desirable upper echelon colleges are looking for more needs-based students to diversify their demographics, so if you're a needs-based family, and you've got a top-notch student, you could be more likely to get a needs-based scholarship by aiming high rather than going to your local state school.  And conversely, the 2nd tier schools, which are still incredible educations, are looking for more upper-class families to make their roster look more prestigious, so if you're an upper-class family with a top-notch student,  you might actually qualify for a discounted tuition schedule at a 2nd tier school because they're looking for families just like yours to join their alumni ranks.  So keep that in mind when you start searching for colleges.

One more note on picking a school - it can be perceived that in order to get the best job with the best salary and live your best life, you HAVE to go to an ivy league school.  But I would argue a contrasting view.  Those ivy league schools have big-name professors who will rarely actually be teaching your undergraduate student.  You'll mostly get Teaching Assistants and grad students who will teach the undergraduate classes because the big-name professor is off doing research, or speaking gigs, or writing a book. 

You're much more likely to get good face time, have smaller class sizes, and be taught directly by an ivy-league educated professor if you attend a slightly smaller, less brand-name school.  Less stress on academics can allow for extra-curriculars, more school involvement in clubs and recreational sports, and an overall more enjoyable college experience.  And in my opinion, it's much better to graduate a healthy, happy, curious young adult who loves to learn because he or she had professors who instilled that genuine thirst for knowledge instead of burying them in homework they couldn't hope to balance with a social life or an internship.  Most HR professionals will tell you that where you went to school is much less important than the fact that you WENT and got the piece of paper.

College is so much more than just what you learn.  It's about discovering who you are, what you like, and where you want to be heading.  It's an exercise in time management, individualism, work ethic and responsibility.  These are the skills and ideals you've taught your children all their young lives will finally be put to the test.  Why crush their soul by sending them to a school that will make them hate learning and everything that goes with it?  Instead, I support finding a college that will be a good fit for your student and then finding a solid way to pay for it.

Developing a Savings Plan

It's important to start your 529 plan as early as you can, to give it time to grow, so encourage your friends to make a donation at your baby shower, or ask your parents or grandparents to send that birthday check right over to the 529 account instead of giving your 3-year-old money to spend at the store.  They'll get a lot more benefit from that money in 15 years, and by talking to your children about how you're saving for their future,  you can help to instill this idea that saving is worth it, and that your investment will pay off when they can go to college without incurring debts they'll spend the next 20 years paying off.

If you heavily front-load your 529, then continue to save with intention every year after that, it is possible to have money left over after your kids or grandkids graduate from college.  Also, in your early retirement years, or in the years leading up to retirement, if you want to push off some of your assets to that 529 to help it continue to grow, then 15 or 20 years later when the next generation is starting their college journey, that 529 plan could have enough of a balance to pay for all the children in your family to go to college forever.  Discuss this idea with your financial planner if you'd like to create a generational endowment fund for your kids and grandkids.  Certain states have limits of how much money can live in a single 529 plan, but you can break it up into multiple plans or put it into a trust with the help of your financial planner so that none of your family members ever have to worry about saving for college ever again.  Now that's the gift that keeps on giving!

If you want to learn all the nitty-gritty details of a 529 for yourself, you can read all about them on Wikipedia.  https://en.wikipedia.org/wiki/529_plan

If you’d like a quick summary of the pros and cons, you can revisit my blog from a couple of weeks ago where I talk about my 5 Favorite Ways to Save for Minors.

https://www.luminarywealth.com/bloglist/2021/4/5/my-5-favorite-ways-to-save-for-minors

I hope this was helpful, and if you have any follow-up questions, don’t hesitate to reach out to me directly.  You can email Lee@luminarywealth.com, or connect with me on LinkedIn or Facebook.

Keep saving, and have a great day!