Ever before becoming a parent, my wife and I knew that one day (if we’re fortunate enough to have children) we’d want to have enough money stashed away somewhere that we could use to help our kid(s) pay to go to college. We both had a traditional four-year college experience and we always envision our kids sharing in that same sort of experience, but what exactly saving money for a college fund was supposed to look like, we had limited knowledge.
Like many new parents, when we got the news that we had a baby on the way, all of a sudden that planning for the future stuff got real! We spent the next several months consuming what we thought would be helpful for becoming a parent, like “All Babies Cry”…haha, ain’t that the truth!, but we also were reading up on what people in 2016 were doing about saving for college funds.
Work experience got me familiar with some financial terminology, so before needing to take any action on opening up some kind of account, I already had a general idea of what options were out there, including the most popular 529 savings plan.
A 529 plan is a tax-advantaged investment savings account used traditionally to help fund college.
Let’s break that down.
Tax-advantaged = meaning you can deposit post-tax money (money that has already been taxed) and that money then is allowed to grow tax-free.
Investment savings account = meaning an account you put money into that’s then invested into the market to appreciate and generate income.
When the money is needed for educational expenses, you can withdraw it tax-free. This is a great way to save for college because, in a normal investment account, the appreciation or gains on the money invested would traditionally be taxed at the capital gains tax rate when withdrawn – but not with the 529!
529 plans are often state-sponsored programs, so each state offers them and they all vary in their investment options (where you choose the money to be invested), the fees (how much the plan charges to invest thru it) and the tax benefits (some states allow you to write off your contributions to the plan on their state’s tax return).
Another high-level piece of info, in most cases you don’t have to be a resident of the state in order to open a plan with that state. Meaning I can live in Delaware and open a 529 plan with Utah. In fact, that’s exactly what we did. Wait, why though? Utah has very low fees and great investment options (in particular Vanguard mutual funds, which I’m a huge fan of!)
I’ll write another post that will dive into the 529 plan, what to look for, how to set it up online and more, but here are some helpful links until then:
So a few weeks after our daughter was born, her Grammie let us know that she had set up a 529 plan in the state of Utah. Nice!
So this thing is pretty neat – every occasion, like holidays, birthdays, etc. instead of gifts, our friends and family can contribute to our daughter’s 529 plan via a link in an email or a text message that we send out. The person contributing is able to leave a note that she’ll be able to read one day and that’s it! The money is set aside for the kid’s college fund and it will grow tax-free! As parents, we get an email every time someone contributes to her fund so we’re able to follow up with a thank you acknowledgment and we are able to check the balance and manage the fund completely online.
This ability to grow tax-free money and withdraw it tax-free for qualified educational expenses is truly awesome but what if she doesn’t go to college? Is that it? That money is lost? DEFINITELY NOT.
You are able to withdraw any contributions that were made to the 529 plan with no issues like taxes and penalties. But you will be hit with taxes and a 10% penalty if you take any of the earnings or capital gains out for non-qualified expenses.
Here are my thoughts:
Today’s world is so connected that people can literally learn how to do anything online, and there is an obvious lack of tradesman across so many industries that it makes it a real possibility that our kids might not go to college. So it made me think if we have this vehicle that our friends and family can access and contribute to, maybe we (the parents) shouldn’t also contribute and put all of our eggs in one basket (the 529 plan).
So the day our daughter was born I opened up a Stash account using my phone. Stash is an investment app that allows you to automatically deposit money directly into an account and then purchase mutual funds with cool names like “Rolling with Buffett”. This is a real investment account just like opening one up with Fidelity or Charles Schwab, just with a new-age look and feel and easy to use. I was pretty aggressive at the start and I put away $50 a week during her first year into this Stash account.
I remember hitting the milestones that the app provides and saying every couple of months, “hey babe, check it out, she has $500…she has $1,000…she has $2,500….holy crap, she has more than us! Haha
More recently we opened up an investment account with Vanguard and transferred the money from Stash to Vanguard. The only real reason we did this was to consolidate because we have a couple of investment accounts with Vanguard already. We continue to put away $25 per week into this account and invest it in a total stock market mutual fund, specifically VTSAX (Vanguard Total Stock Market Index Fund). And we’ll continue to do this until she turns 18. Our goal is to have her a nice nest egg to begin her life as a young adult.
Knowing that our little one’s future is uncertain, I feel good knowing that we have a couple savings options in the works for her. And if another kiddo comes along, we’re going to do the same thing for them.
Have you started a college/life fund for your kid(s)?
Do you need help figuring out what option is best for you or have any questions??
Shoot me a message or leave a comment below!