Why this financial advisor hates contributing to a 529 plan…but does it anyways

This financial advisor says save in a 529 plan

Yes, save for college… you’ll be thrilled you did

As a parent considering whether or not to open a college savings plan, you’ve probably already asked yourself the following questions: Is my child going to college?  What if I end up needing that money?  Will this small contribution even matter?  What will college even cost in the future?  What if he/she gets a scholarship? What if… what if… what if…?

Ever find yourself playing this game?  I know that I certainly did.

As a financial advisor, I understand the college savings numbers more than most. Due to my detailed knowledge of those figures, it’s easy to imagine that it would be easy for me to make the obvious choice and fund a 529 plan.

Well…it’s not!

I find it difficult to forego my hard earned money to pay for the unknown and distant expense of college.  College that “O” may or may not go to (Sidenote: he’s going…whether he likes it or not.  And how can he not like it.  Hey O, Would you like to go live with your best friends, without parental supervision, and play videos games for 4 years in a row?  Um…yes!).

But I digress…when it comes to me and my money, it’s a control thing.  I want complete control over that money.  I want it in my bank account, my savings account, or my retirement account.

However, I know (just as many of you do) that saving for college is something that I should also do as a responsible parent (although I would like “O” to have some “skin in the game” during college, it still makes sense to save).  College isn’t getting any cheaper, and I don’t want to be playing catch up as enrollment approaches.  Therefore, instead of allowing weak excuses (see the questions above) to get in my way, I set up a monthly contribution to a 529 plan.

$250 per month. Automatic. Every month. Directly into a 529 plan. Habits, Habit, Habits…

Now, let’s address a few common questions…

Will My Child Even Go to College?

I have no idea, but let me ask you this.  What if they do and you’re not prepared?

What if they do and you haven’t saved a penny?

My gut tells me to save as if “O” is going to college. If for whatever reason he doesn’t, then I’ll worry about it then.

What If I End up Needing the Money?

In our family, 529 money is earmarked for college.  However, in the apocalyptic scenario where N and I need the money, I’ll simply take it out.  Yes, I might pay taxes on it, and yes, there is a chance that I will be penalized in some way, but a 529 plan isn’t an ironclad prison for your capital.

When I absolutely need the money, I can get to it.

What If He Gets a Scholarship?

Bummer!  You did the responsible thing and saved money for college, but now you get to keep it.  What a shame!

Who cares that you need to pay ordinary income tax as opposed to long-term capital gains? You had the money set aside in case your child didn’t get that scholarship.  Furthermore, even if your child is lucky enough for some type of scholarship, the majority won’t cover the full cost of college.

If your child does receive a scholarship, then you have options for your 529 account balance.  Keep it for yourself, change the beneficiary to another child, or maybe even give it to the intended beneficiary as a financial head start for their post-college dreams.

Will This Small Amount Even Matter?

Yes, absolutely!  Saving at any level is better than not saving at all. Whether it’s for Christmas, a birthday, or a christening, encourage your family and friends to contribute to a 529 plan.  What will your child really appreciate more in the future?  That 15th toy from grandma that they will use once, or some extra money in the 529 plan that will help them achieve their goals?

By saving anything at all, you take advantage of a long investment time horizon and the power of compounding.  Both are great leverage opportunities when it comes to your money.

What Will College Even Cost Then?

I have no idea, but I imagine that it will be a lot!

Personally, I don’t believe that college can continue to increase at its current rate (just to be clear, this is my personal opinion based on zero personal research on the subject).  That being said, it’s highly unlikely that it will be any cheaper than today’s costs.

Focusing on how much it may cost in the future takes unnecessary attention away from the real issue at hand – Saving now!

Bottom Line

For me, the decision to make monthly deposits into a 529 plan meant ensuring that O would be able to go to college.  Yes, that is a maybe, and yes, he may get a scholarship, and yes, I may lose some tax opportunities if he doesn’t go.  However, from my perspective, as a parent and a financial advisor, these unknowns only get in the way of making a sound investment and financial planning decision.

My best advice is not to let these excuses get in your way either.

Required Disclosure

Participation in a 529 College Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses or that a beneficiary will be admitted to or permitted to continue to attend an institution of higher education.  Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals.

Depending upon the laws of the home state of the customer or designated beneficiary, favorable state tax treatment or other benefits offered by such home state for investing in 529 college savings plans may be available only if the customer invests in the home state’s 529 college savings plan.  Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. You may also wish to contact your home state or any other 529 college savings plan to learn more about the features, benefits and limitations of that state’s 529 college savings plan.

Consider the place of various education planning vehicles in the context of the overall financial plan with the appropriate professional(s). For more complete information, including a description of fees, expenses and risks, see the offering statement or program description.

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.

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