What is the best reason to, or not to start a 529 for a child?
I was planning on doing a 529 for my newborn, but I originally thought they were tax deductible at the federal level, and turns out they aren’t.
So it appears the only benefit is withdrawing the investments and not paying long term capital gains?
Any reasons not to do it?
Ie-
-would it lessen chance of getting financial aid or loans? (I likely won’t qualify for aid)
-worse possible investment options than the market?
- money tied up/lost if kid doesn’t go to college?
Thanks for sharing any insight
Posted by concrete0928
26 Comments
I appreciate the post. Curious about this too
With the secure 2.0 Act, 529 is not just a college, but also a retirement fund. If your kid doesn’t go to college, you can convert it to their IRA.
Reason for:
Some states let you deduct contributions from state tax.
Saving tax on the gains.
Reason against:
Your kid doesn’t go to college or doesn’t need your money.
Worst case you would take it out paying tax on the gains and penalty, or you could rollover it as Roth IRA for beneficiary (look up the rules), or you can change beneficiary to someone else who needs it, may be your grand child.
Are you already maxing out your 401k, HSA, etc?
Your kids can get loans, scholarships, grants, etc for college. You cant get a loan for retirement.
The only real reason against that I’ve found in my own research is that 529 money is considered an asset when your kid applies for federal student aid for college, and could significantly reduce the amount of aid and/or loans they would otherwise be eligible for.
Otherwise, now that it can be rolled over into an IRA if not used for school, there’s no other reason not to that I can see.
I’m very for 529’s, and have one for myself and kids. Fun fact, 529’s have no age requirement. You could save for your 70 year old granny, and then avoid the non-qualified withdrawal on it once she passes to accumulate money without tax drag. You can also convert 35k/person to a roth IRA 15 years down the road.
The optimal savings amount for kids and college is less than the full cost of tuition, to benefit from educational tax credits. If you assign the 529 to granny the 529 funds shouldn’t have play in FAFSA calculations, though granny’s 529 funds can be shifted to another person at any time.
Max out all other tax advantaged accounts first. If you have some leftover, then do 529 for your college savings. No cap gains is nothing to scoff at.
My state also lets you deduct the contributions from state taxes if you use their plans, which is something at least.
I started with 529s. Stopped and moved to UMTA accounts.
I got a 529 for my daughter. I opened it when she was born. Invested in the SP500 index fund. You have to find a 529 plan that offers it. I put money in it every month. It’s worth it. Daughter is 18 now and in an out of state college. Her college is paid for. Thanks to the 529.
Depending on who is the owner of the account you will need to report it on their fasfa but at a heavily discounted number, like 5%of the actual total counts. Or not ar all if its grandparent/sibling/non-custodial parent owned.
Some states give you state tax benefits.
It can be used for trade/vocational schooling as well.
You can convert the amount in it to an IRA over time if you don’t spend it all. With some limitations/ stipulations.
You can hand it down by changing ownership and beneficiary.
And obviously tax free growth
It is a good account. Better than nothing. Good place for friends and family to deposit into. Can be converted to Roth later.
The best investment for a child is to learn to invest yourself and teach them the same thing. IMHO
To me, this isn’t an “investment” decision, it’s a parenting decision. It’s about trying to make sure they have money to continue their education without being saddled with student loan payment for the rest of their life.
yup, you should. you can open it first then decide the contribution later. no min balance as far as I remember… and contribute up to your state tax deduction limit (typically 10K)… also, for now, up to 35K can be rolled over to roth but the account has to be opened at least 15(?) years. keep in mind, they look at 529 accounts when considering college financial aid package.
Check if your state offers a tax deduction. I take advantage of this program for the reasons below.
-My state offers 8k per child per year tax credit.
-Unused funds can be rolled to another person/child’s account.
-Unused funds can be converted to an IRA
-Any scholarships received can be withdrawn from the account penalty fee. (You will pay taxes on gains)
At the time we did it I didn’t like the strings attached or limited investments. I tend to be a buy and hold investor so the tax implications were less. I ended up just setting up a separate brokerage account and contributed monthly until about 2015 when we far exceeded the planned amounts which we had bumped already from 80k to 100k apiece.
We also used it as something to engage with the kids on. Encouraging them to do well in school and also go for any scholarships or anything that saved them money. The rule was that we would use to pay for school but if there was any left and they got their degree, I would transfer the balance to them in gift sized chunks. It could be used to invest or house downpayment etc.
We’re getting close to done now. Oldest has graduated and working. As a Covid kid he went to CC before transferring to a 4 year and saved a ton. We gifted him roughly ~38k left last year and he has it in investment accounts. The younger has ~30k left but he went away for all four years. The tax implications were minimal because I simply paid for school out of pocket and transferred securities as needed to our accounts so there was no tax event. Essentially it just meant we were putting more into retirement in the past five years.
I set one up for my son. “it appears the only benefit is … not paying long term capital gains”
Yep, seems like a good deal to me.
You can use 529 money towards k-12 expenses, but there’s a limit of 20k you can withdraw tax free in 2026 (was previously 10k)
My husband and I both grew up poor and we’ve researched this along with visited with financial professionals. We’ve looked at ways to grow wealth for our daughter and are starting a 529 because we’ve hit the point where we’re maxing out our 401ks and doing a backdoor Roth for ourselves. We’re dumping in money now so it can grow tax free, and we’ll be pulling out the max for private school tuition each year. Compounding over 10 years in that account is going to be better for us tax-wise than just throwing money into the stock market and paying capital gains.
We did it and are so grateful! Our state provides free bachelors degrees to residents so both my kids used the money for rent and food. It was nice knowing they had money in their account every month that we didn’t have to dig into our change purses for. We put in so little, and got so much out of it! Highly recommend.
I see the benefits, but as I value control and flexibility we are opting to instead plan on taking money out of our traditional brokerage for our kids college. We are saving aggressively for early retirement but factoring in that we also want to help our kids with college when the time comes, and it will all come from the same pool.
These programs have federal rules but are administered by each individual state. My mom set up & contributes for the grandkids. Wisconsin. I looked at a statement & it appears there are two funds in Wisconsin, an ‘aggressive’ one and a ‘conservative’ one. These may be the same funds the state pension fund runs. A very good program by all accounts, so far (hoping they haven’t stupidly invested big bucks in illiquid->insolvent ‘private equity’). If you’re comfortable with that, it’s great. If not, a 529 is not a good option in Wisconsin.
Given the increasing cost of education I’m for it
Create a 529 and make yourself beneficiary. When a kid needs it, carve out a piece and make the kid or grand kid a beneficiary. You can split 529. You can change beneficiaries. If you set to yourself first, and 15 years go by and kids never use it, Roth conversion. Or use for grand kids. I like the flexibility of the 529. But do your Roth IRA first.
Vanguard’s lets you invest in VIAGX. it’s like VUG. powerhouse. Use this one.
No major reason not to do it other than it will minorly reduce financial aid. Also 529s in grandparents names aren’t considered in the financial aid calculation. See more details below.
[https://www.ml.com/articles/could-your-529-education-savings-account-limit-your-childs-financial-aid.html](https://www.ml.com/articles/could-your-529-education-savings-account-limit-your-childs-financial-aid.html)
Other benefits:
– if your child ever ends up being disabled (god-forbid) you can roll this over to an ABLE 529 plan (this is reason enough in my book)
– you can use it. So let’s say you have a 13 year old and suddenly realize you want a more flexible career? You want a French class? Use it for yourself
Start by maxing Roth IRA contributions for any wage earners.. same tax free growth with no restrictions. All principal contributions in a Roth can be used for education expenses and just leave the growth in the account for retirement. If you are already maxing out Roth contributions and want to invest more for college then a 529 makes sense.
The impact is modest for FAFSA: A 5.64% assessment rate means most of the 529 balance does not count against aid eligibility. Aid eligibility is more sensitive to income than assets.
True, but if your kid goes a different route, that tax-free growth could feel like a missed opportunity! Flexibility’s key!