I’m a planner. I’ve always been one. I always will be. So when my son was born, I immediately started saving money for his “college fund”. Even if it was a measly $10 every two weeks at the time (we were two 25 year old kids with a baby and a cat, living off of 30k a year while paying a mortgage, utilities, and juggling 15k in credit card debt).
When my son turned 4, I did the math. Over the years we’d managed to pile just around $3,000 for his “college fund” into a high-yield savings account with a popular online brokerage. But even after increasing our savings rate to $60 per month, he just wouldn’t have enough for school in 14 years. Even if we increased it to $100 or $200 a month, it still wouldn’t be enough. There had to be something that we could do. So, I began looking into the stock market.
It was basically a whole different world to me. There are about a million different strategies that you can use, while working with about a million different companies. Since my goal was to save for my son’s potential future college tuition, a 529 college savings plan seemed to appeal to me.
Tax advantaged
Haven’t heard of it? Neither had I. In fact, they’re fairly new. The 529 savings plan is an investment account that is marketed to parents, guardians, and non-minor loved ones such as grandparents and meant to save money for educational expenses. On the surface, it’s very appealing. It’s number one feature? Pay no taxes on gains used for educational purposes.
Truthfully, if you are 100% certain that your toddler will grow up and want to go to college, then this is the plan for you.
Penalties
What if , however, you’re like me and decide that you’re not psychic. What if you don’t know if your son will actually want to go to college? What happens then? Well, you’re shit out of luck on the one.
I originally thought that I’d just have to pay taxes on the gains not used for educational purposes. That seems logical, right? WRONG. As it turns out, if little “Timmy” grows up and wants to use his money to open a small business or invest in real estate rental properties, then not only will federal, state and local taxes have to be paid on the gains in a 529 account, but a 10% penalty fee will also be levied against the gains. To me, that’s not worth it.
Really Not Worth It
I’m a planner by nature. I’m also an investor. Investing always involves some level of uncertainty—a gamble if you will. To be honest, the chances that little “Timmy” doesn’t want to go to school are just far too high. For that reason, investing in a 529 Plan would be a very poor investment vehicle for us. We would much rather open a traditional investment account with our brokerage. That way we just end up paying the standard taxes instead of an extra 10% penalty on top of those. That way little Timmy can use his money however he likes and we don’t lose a huge chunk of change if he decides to steer clear from university.
