A few years ago I did a post on the tax advantaged account where you could save for your children’s future college called a 529 plan. Plans can vary by state, each having their own slight nuances and tax implications. It’s been a few years since BabyMoneyFinance came into this world and I’ve had fun conversations with other young professionals over the years on if a 529 is worthwhile or not. I thought I’d do a review of them, especially as there have (in my opinion) some recent positive changes to how 529s work. 

Predicting the future 

Although the conversation has shifted a bit (in a healthy way IMO), college is still the dream of many parents for their children. Going to college for me opened up a lot of doors and equipped me well for a career in corporate America. For others though there could be other options like trade school or the military or jobs that don’t require a college degree. 

When your little baby enters into this word it’s very difficult to predict what they’ll be doing at age 18 and if they’ll want to go to college. Will college still be a thing in 18 years? If so, how much will it cost? Over the past few decades the cost of college has risen by quite a lot and although despite calls by some politicians to ‘make it free’, it’s not and doesn’t appear to be changing. Or what if your future 18 year old gets a full ride to college? Or decides to pursue another path? It’s hard to know!

I don’t know the future so I make decisions today based on the information I have. So, I’m saving for my kiddos college expenses. I don’t know if I’ll be able to do so every year until they turn 18 but I’m going to try to do so. My parents blessed me with the chance to graduate college debt free and I know they worked hard to make it happen, and it’s been a huge blessing to me in getting into my own life journey. I don’t know what college will look like in 18 years but I’m guessing it’ll still be around and be something we’d like our kids to do and also I’m guessing it won’t be free. So, for these reasons I’ve decided to save for their college as I’m able to. 

The high level of 529s

Generally speaking I prefer to pay less tax vs more tax. Not that I don’t appreciate the benefits our government provides (insert your political leaning joke now) but we have roads, police, firefighters, armies to protect us and generally a government that allows us to pursue our own happiness. 

The government offers tax breaks for things they want you to do: like saving for healthcare, retirement or college. They would prefer us to be able to afford it vs them having to step in so they incentivize us to do so. I appreciate that. So, to encourage us to save for college, the government has setup a financial account called a 529 plan. High level you can put post-tax money in and then let it grow over the next 18 years until your kiddos go to college. They can then use that money (and the thinking it’ll have grown by a lot) tax free to pay for college tuition and most expenses. Cool. 

If they don’t go to college or don’t need it, you can give that money to siblings or close relatives. Or you can pay the tax on the gains and a 10% penalty and pull it out for other things. Or – hot off the press from a new law that goes into effect in 2024 – you can roll that 529 over into a Roth IRA for your kid’s retirement. A big reservation I’ve heard from other parents is ‘well what happens if they don’t need that money’ and to me the ability to now roll it into a IRA is huge and basically solves that.

Photo by Michael Marsh on Unsplash

The nitty gritty of a 529

There are limits to how much you can contribute annually and in total ($17,000/year or $235,000 in total) but there are all sorts of little tips and tricks as it is with most financial planning and taxes. 

There are limits to what you can spend that money on for college and what you can’t spend it on – The College Investor has a great article that better states what you can and can’t but to me it doesn’t seem too unreasonable! But know that most things you’d need for college – like laptops, books and supplies are covered!

I believe some states have requirements on where you can use the money ie a school but Georgia allows me to use that money for college anywhere in the US. Although we’re not planning on it, it also allows us to use this on K-12 private schools if that came up. Your state might be different but know at least in my case it’s pretty flexible! 

My plan

A 529 is not a fool-proof perfect plan but IMO it’s a pretty good option for parents to take advantage of. I do really like the rollover IRA option so if the kids get a full ride or college becomes free, they can still take good advantage of that tax free money. In my state (Georgia), I can also deduct my contributions from my state taxes. The plan is flexible enough for at least the scenarios I think we’d encounter and I love not having to pay taxes on the growth. 

$17,000/year (the max you can contribute without more tax penalties) is a lot and I’m no where near contributing to that. For now I’m working on doing $4k per kid. Some back of the napkin math told me that at an average growth rate of 8% (the historical stock market average return) over 18 years at $4k invested each year and I’ll have around $80,000 or roughly what it costs today in my state for a 4 year instate school. Realistically college will likely cost way more ths thst in 18 years but $4k is what we’re able to do now and what we’re working hard to make happpen for each kid! Maybe some years we’ll do more, but also maybe some years less! 

All in all I’m a fan of 529s and am utilizing them for the kids!