Chronicles Of A Father With Cents

Simple Life. Personal Finance. Family

I Need to Open a 529 Account, Right?

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One of the first things I wanted to do when Mother with Cents was pregnant was open some sort of college fund for our newborn but had no prior knowledge of it. When I
researched and discovered 529 accounts, I had to get a details of why is it better to open one than a good old savings account, the tax advantages, what type of investment plan I should do, which state should I open the account with..etc. As I went through all these questions, a bigger question hovered over me: What if our son does not want to go to college at all?

Both MwC and I came from family backgrounds where college was a rule and also a big achievement to get a college degree and find a good paying job thereafter. It ingrained in our minds that our son should go to college. When I approached MwC about opening an account, she never gave a second thought of getting one. I guess you can say that he is going to college whether he likes it or not.
Of course, things change and around the time when he can go to college, there might be a situation is where having a college education may not be that big of a need. Even today you can see that slowly evolving where there are vocational schools that offer certificates for whatever specialty you want to get into. Also getting into be an entrepreneurial if you have that mindset in high school is another option if you want to bypass college. Help starting a business can be super influential to an 18 year old and may not stress about going to college at all.
 

Since I laid the reasons why BwC may not consider going to college, why ponder opening a 529 account?delfi-de-la-rua-140752

Well for one, both of our parents were going to give us money that they specifically want to use for his college fund. We could have said, ‘Thanks for the check we will definitely open one for him.” Then turn around and use the check for something else like down payment for a house or a car. That does not feel right and should definitely obey where they want this money to go. After all this is coming from our parents and they want the best from their grandson and believe funding for his college will help him achieve what he wants in life. Another reason we want to open a 529 is we want him to know he has a reliable option to attend college if he wants to attend. We will have a good amount of assets in the 529 at the time and could pay for half if not most of his tuition, his books and housing.

What are the setbacks for BwC for not going to college and have a funded 529 sitting there?

After going through some research here is what I found if BwC does not go to college:
– Since he would be the beneficiary, I would be owner of the account. I could change the beneficiary if he decides to forgo college give it to another relative. Here are my choices: a sibling if the both of us have a second child, first cousin, grandparent, aunt, uncle, or even myself
– Could cash out the assets in the 529 but it will be costly. If I withdrawal the money for something other than educational expenses, I would have to pay a 10% penalty fee plus income taxes. So let’s say my 529 is $100,000, which means I would have to pay a $10K penalty plus taxes…yikes!!
– Pay for a technical or vocational school. Oh yes, I can use it for this type of school if he wants to decide to go to one. Also you can use the assets if he wants to attend community colleges as well. So we have some flexibility if a four year university is not in the works right after high school.education-flatlay_4460x4460
Having all these options is great to know. My last resort would be to cash out the 529 assets and that would be if I know that all the other options are exhausted. Right now, BwC does not have a sibling and most of my first cousins are pretty much out of college. I do have one cousin that is five years older than BwC so that’s a possibility or I can come back to school for enrichment purposes. We have these options to fall back on for the 529 and we would like BwC to use it.

If he does go to college and use the 529 assets to pay for most of his college, wouldn’t he feel compelled to not work during his college years?

 I did say that the 529 account would pay of hopefully half if not most of the college expenses, not all. So he can make up paying the expenses by finding a job. This will be an opportunity for him to learn time management. He can be flexible in his schedule: classes in the morning, work in the afternoon, study at night or work in the morning, classes and study time for the rest of the day etc.. 15-20 hours a week is a reasonable amount of work for a college student. This can help him get good job experience, find out what he enjoys and not enjoy at certain jobs and know how to handle their finances since he will be earning some money.
 

Opened a 529 account a few months before BwC was born

With the pros and cons of opening a 529 account, we decided open one at the beginning of last year from Scholarshare, California’s 529. We felt confident that this account will be used toward education whether it’s for BwC or someone in our family. The account is doing pretty well so far. I contributed $2,500 so far on top of our parents’ contributions and getting around a 10% return. The fees are not high right now since the balance is not high but with the funds in the account have annual fees ranging from .10% to .21% we will rebalance it as the amount increases along with the fees.

Do you have a 529 account? You think it’s good to have one? Please feel free to comment below.

12 Comments

  1. This is a great article! I’ve been debating back and forth with this since forever….well, technically since I started this journey lol. I first heard about UGMA from my boyfriend but after speaking with my Fidelity advisor, he gave me other options as the 529 Plan. UGMA is irrevocable, once the account is turned over, we can’t take it back. Like you, we just have one child. if he decides not to go to school, he can use the money for other things, even if the money was planned to use for college. UGMA scares me. I actually like the 529 plan better but then the ‘what if’ he doesn’t want to go to college is forever stuck in my mind. I think I just have to go for it and just plan for the best.

  2. This is a good article that lists the other ways a 529 can be used. If our son decided not to go to college was one of my fears as well when it came to opening a 529. When Omar and I discussed it further he mentioned that it could go to the next kid if that’s the case. Of course I asked him, “What if that kid doesn’t want to go to college neither?!” To which his response was, “Oh. One of them will be going to somebody’s school!” Lol. Thanks for listing some of the other options that I wasn’t familiar with!

    • Lol Omar!! He wants someone to go to college, whether its your son or a relative.
      It’s nice that the 529 gives options to fall back on if your son does not go to college. It’s not a dead end street where he skips college you have to withdraw those funds and take that 10% penalty.

  3. Very informative. I liked the way you lay it out as pros and cons. I don’t have kids but I hear about the 529 plan a lot in our PF community.

    To me, it seems like something really far away. I agree with you that even today the value of college…it’s negotiable compare to the high price tag and area of concentration. I personally would rather give my child $100K to start their own business (or try to). But if 30 years from now, colleges are still in business and worth it – I would open up a 529 plan too.

    • Thanks Lily, I understand why some would be hesitant to have their kid to attend college. The huge tuition fees being a big factor and if college would be beneficial for him/her to find a career if they are undecided.
      I would do the same thing if our kid had the entrepreneurial mindset to start their own business right after high school and give them a reasonable amount to start out.
      We want the funds in the 529 plan to be used for education whether its for Baby with Cents or one of our relatives and hopefully it will be worth it for whoever uses it.

  4. makingyourmoneymatter

    August 31, 2017 at 8:25 pm

    Education is so important! I love having 529 plans and am fortunate that our state offers a deduction as well for contributions. However, I still do have a little bit of uncertainty about what will happen if my kids don’t end up going to college. Since I have 3 kids, I can definitely shift between the accounts if that happens. You have some great points about that scenario!

    • You definitely have other options if your kids do not go to college. Switching beneficiaries to other relatives or even yourself are alternatives.
      I also believe that education is really important and hopefully college is a viable option for the next generation of kids. With 529 accounts, it will definitely help financially and minimize the worry of student loans.
      Thanks for stopping by Kathryn!!

  5. It sounds like the 529 Plan is similar to what we have here in Canada, the RESP (Registered Education Savings Plan), it too has to be used only for education. We just recently opened one up and are excited to see it grow tax sheltered over the next 17 years. With education continuing to increase in costs this will be helpful. We also are ‘expecting’ (haha, the parental expectations begin) our child to go to university as we both value education greatly and both have post-baccalaureat degrees.

    • I can’t imagine how much college will be when both your kid and mines are able to attend. Let’s hope the college fund can cover at least half of the college expenses. Let’s just continue to contribute both of our college funds and worry about the college expenses when they are close to graduating high school….lol!! Thanks for commenting GYM!!

  6. Interesting article. It sounds to me that the worst case scenario really is that you’d be losing about the last year (10%) of returns, plus need to pay tax like on any non-tax free account. On the other side, college tuition reached bizarre heights, and it is impossible for most students to finance themselves working summer jobs. The 529 seems to be a really good option.

    • Definitely the 529 is a wonderful option and with the rising college tuition cost you would need every cent in the 529 when the beneficiary attends college. We are hoping if Baby with Cents attends college that 529 account will cover at least half of his college expenses.
      Thanks for stopping by Chris!!

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