Kid Money: 529s, Savings Accounts, and More

529-tipsLadies, have you opened a 529 savings account for your child yet — or did you opt for a savings account or investment account? What are your best tips for 529 accounts and kid saving? In general, what do you do with the monetary gifts your children receive from relatives? Do you set aside any non-tax advantaged money regularly for your children — or have you prioritized non-tax advantaged savings for yourself above tax-advantaged savings for college? 

For my $.02, we have a 529 account for each son, but neither has any other kind of savings account. When Jack was born, I did my best to learn from the mistakes of my 20s, when I sat on money because I didn’t really appreciate the power of compound interest, and always felt like I didn’t “know enough” to invest. So after he was born, I gave myself explicit permission to not know a lot about 529s — I didn’t research which 529 too much (I chose New York State because you can deduct 529 contributions from your income, up to a $10K max per year per couple), and I didn’t research which funds too much (Aggressive! Done.) We set up an automatic contribution from one of our savings accounts — it was all very easy to do online.

Our automatic contribution wasn’t huge — it wouldn’t even get us close to the max — but it did represent two decisions. First, it represented a desire to put ANYTHING in there — I really believed then (and now) that whatever we can do, even if it was only $20 a month, would make a difference because of compound interest. Second, it represented a priority shift. I read an interesting article a while ago that tax-advantaged savings was the thing to focus on — so the 529 accounts rank below our 401Ks and IRAs, but above other, non-tax advantaged savings. In fact, the amount we choose to go into his 529 account monthly was the exact amount that we had been investing automatically beyond our retirement accounts.

I will also say that all money that Jack receives as a gift (from family members, birth gifts from colleagues, etc) goes into his 529 account — I haven’t even set up a savings account. My reasoning here is that, well, he’s not yet 4, so he doesn’t actually NEED the money, and won’t for many years — it would be better served in not just an interest-bearing account, but in the stock market. Our 529 accounts had a minimum of something like $25 for the opening contribution — whereas last I looked, most Vanguard funds have a minimum of $3,000 for investment. A friend of mine has commented that he thought that this might be a “moral issue” — because I am taking my child’s gifts to use for tax deduction purposes — but I disagree with that assessment since, after all, my kids are getting every cent intended for them. (Ladies, what are your thoughts?)

When Harry was born it was a bit of a question for how to divide the contribution — Jack had had almost 3 years of getting 100% of whatever we could contribute to his 529, whereas Harry would only get that benefit at the END of his 529 career, when Jack will be (presumably) off at college. Again — with hopes that the interest would make a difference — we eventually did decide that Harry gets 2/3 of the amount we’re contributing. After a few years we’ll even it out to a 50/50 split, I suspect.

Over to you, ladies — have you opened a 529 account? Did you shop around and decide to contribute to a plan in a state other than your own? Did you also open a savings account (or investment account) for your child?

Further reading:

Pictured: Kate Spade New York ‘Cedar Street – Clouds Lacey’ Zip Wallet, on sale at Nordstrom for $98 (was $198).

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Comments

  1. SFBayA says:

    Subscribing. We’re looking at 529s for DD due in June and I’m eager to see what wisdom the hive shares.

  2. Stephanie says:

    We have a 529 plan for LO but we just went with what our financial advisor suggested. So I will be following this thread closely in hopes of learning something…

  3. Maddie Ross says:

    We have a 529 for our daughter. We funded it initially with a gift my parents gave her at birth and after ignoring it for 6 months because I was just too overtaxed to think about it with a new baby, we finally set up an automatic deposit of $250/month. After paying student loans, all our other expenses and for our very expensive daycare, $250 feels like a lot. But in the grand scheme of things I’m super concerned that it’s not enough. Our daughter will go to public school, so I keep telling myself I’ll redirect some of the daycare $ to the 529 or another savings vehicle in a few years.

  4. EB0220 says:

    I did a bunch of research on 529 plans. I was concerned that the investment and expenditure options are limited, so we just opened investment accounts in our daughters’ names. We contribute $300/month to each. Right now they’re just invested in the S&P Index because I didn’t want cash sitting there. At some point, we may expand our approach and/or contribution, but I’m ok with a simple approach for now.

  5. Nancy P says:

    We set up a 529 after our son was born (mid-2013) and my MIL gave us $10K (standard gift for grandchildren). We didn’t contribute anything ourselves in 2013, but in 2014 we gave $10K at the end of the year. (We get significant bonuses so that’s easier for us cash-flow wise.) In terms of where we invested it, our financial planner (with Citi) said that he invests his in the NY state plan, so we figured that was good enough for us. We plan to put in $10K (or whatever the tax-deductible max is) every year.

  6. I am considering a 529 plan but I’m also concerned about putting TOO MUCH money into it. What happens if you over fund it?

    • Nancy P says:

      What would be too much money? I figure that $10K a year, one child, 18 years = $180K, plus whatever you’ve made on compound interest, so may $250K total? I assume 4 years of private college will cost at least $250K in 18 years.

    • In general you can change the account beneficiary without any adverse effect, as long as the new beneficiary is related to the original one (basically). There’s also no maximum age by which it must be used or level of education (so it can also be used for grad school as well).
      ETA – These are NY rules, may be different in other states.

      • Meg Murry says:

        Yes – so for this reason Kat, you may want to put more in Jack’s name, with the understanding that some of it could be transferred to Harry when Jack turns 18 if need be. That’s what my parents did (before official 529s) – our state had the option to pre-buy in-state credit hours at the current prices, so my parents had purchased about 3 years worth of credits in my name (as the oldest) and when I was able to get a scholarship to an out of state school instead I signed all the credits over to my younger sister once I turned 18. It was always made very clear that although my parents bought them in “my” name, the fund was actually “ours” and not mine alone.

    • My understanding is that there is a 10% tax on earnings, but not on principal. http://www.savingforcollege.com/intro_to_529s/what-is-the-penalty-on-an-unused-529-plan.php

      • Amelia Bedelia says:

        Kat, this is not correct. there is a 10% PENALTY only on earnings. PLUS, there is tax on the full amount of earnings, at applicable rates. Also, there is a state tax recapture (i.e., additional earnings) on any amount that was deducted on a state return (i.e., the 10k deduction a year available in many states must then be recaptured as income in the year of unqualified distribution).

  7. Noelle says:

    We set up a custodial savings account rather than a 529 because of the penalty associated with a 529 if you don’t end up using the funds for an educational purpose. (I know everyone assumes that their kid will go to college, but what if s/he doesn’t for whatever reason?) So we just set up a custodial savings account for the time being. As far as I can tell, nothing stops us from moving the money from that account into a 529 down the road if/when it becomes apparent that our kiddo is college-bound and/or when the amount of money in the custodial savings account gets to the point that it makes more sense for us to have a 529 from a tax standpoint.

    • NavyLawyer says:

      We did the same, as did my parents (for our children) because who knows what the future holds? I don’t think 529s were around when I was a kid, but I had an ROTC scholarship so the majority of the 529 would’ve been largely useless. But in my family (on both sides), the expectation is to join the military and get schooling out of it.

  8. Anonylawmom says:

    We set up 529’s for both of our kids last year (ages 3 and 1 at the time). We contributed quite a bit to each and now cannot contribute again for five more years without triggering taxes, so we’re not going to. There is no income tax deduction for our state, so there is no benefit to us to contributing annually instead of all at once, and we were lucky to have the money available to contribute. If we don’t use the money for college, we just pay tax on the interest plus a penalty (10%?), so we just end up with 10% less than we would have if the money were not in a 529. Given that our kids are likely to go to college, it’s a bet we are willing to take for the tax benefit. One unexpected benefit is that it feels like we no longer have that money, so we’re not tempted to use it on anything (like a down payment on a new house).

  9. My parents have set up some sort of account for our daughter that they contribute too. I don’t ask too much about it, nor do I count on anything from them. For our part, my husband and I have talked about skipping a 529 and instead setting up IRAs for the kids. Each child will have *some* income per year from the Alaska PFD, which we can put in. We’re trying to figure out if we have to claim they were actually paid for work to put any more in. At 11 months, she’s a bit young to be slinging fries at McDonald’s, but I’m open to the idea of reporting some modeling income for her if it allows us to invest.

  10. We set up 529s after each of our kids was born and contribute $10,000 per year. We use NY state plan and get the NY state deduction (which by the way is $10,000 per couple not $10,000 per kid).

    We had been doing $10,000 per child but once we added tuition and more expensive activities we scaled back given our nanny expense we decided to stick to $10,000 and then contribute more when our younger child enters public K this fall and we are no longer paying for nanny and tuition for private nursery school.

    In my opinion, FINRA has the best college savings calculator since it allows you to inflate contributions.

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