Why I Opened a 529 Plan Before I Even Had Kids
This year, 2019, my husband and I are expecting our first child. An exciting time for sure, but also a time of apprehension. Bringing another human into this world is never easy and for someone like me, a planner, I wanted a lot of things to be in place. The challenge is that there is never a perfect time for anything. My husband and I knew we wanted children, we just didn’t know when, so a part of me started planning for it money-wise. One of my biggest mental shifts in the past few years and especially as I’ve dived deeper into the Financial Independence movement has been understanding how money earned today can buy us time in the future. This concept is something that I’ve been latching on to so hard.
I opened a 529 account 3 months after my husband and I tied the knot in 2013. Call it intentional planning. Call it planned savings. Call it whatever you want, but it was just something I felt I needed to do given where we were financially. Having children also felt like our next big step after marriage. Well, it took us a while to get here, mostly because we ended up traveling the world a bit and pursuing other things before the universe blessed us. (We were DINKS for a while.)
Some people probably think it’s crazy to start planning and saving for something that hasn’t happened yet, but statistically we all follow the average path: get married (save for a wedding), have kids (save for kids), retire (save for retirement) so sometimes it’s just a matter of when you take action because the likelihood of a major life milestone happening is higher than we think.
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What is a 529 Plan?
A 529 Plan is also legally known as “qualified tuition plans.” It is authorized under Section 529 of the IRS Code hence the name. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs and are mostly sponsored by states, state agencies or educational institutions. The money that gets put in is post-tax, but it grows tax free and withdrawals are tax-free as long as the money is used for qualified education expenses like tuition, room and board, etc. There is no penalty for withdrawal as long as it’s for those qualified expenses and it can even be used for elementary or secondary. It’s planned savings for future educational expenses. There’s a whole gamut of what qualifies as educational expenses so I would refer to the IRS site for that list.
Advantages of a 529
A 529 Plan basically allows you to force save for future educational expenses. We were already in the process of maxing out our tax-advantaged accounts and I felt like this was the next best step. I had no plans to maximize this account, but just to set aside money for our future children or future self or other beneficiary.
There’s some peace of mind knowing that we’ve set aside money already for our future child. Depending on how many we have, we’ll have to start cracking on additional savings, but a start is a start.
I opened a 529 through Fidelity as I already had a retirement account with them. Unfortunately, the state of NJ doesn’t provide an incentive to contribute to a 529 plan so I opted into another state’s plan as the fees were lower. The NJ Best Plan does offer a tax-free $1500 scholarship provided the beneficiary attends a college in New Jersey and the account has been open at least four years and contributions are $1,200 or greater. Check out this list for states that provide a tax deduction for in-state contributors. I may move my account into the NJ Plan as time goes by so that we can take advantage of any other benefits.
I chose a plan with the lowest fees, set up automatic contributions and set the investments to be as aggressive as possible. I set myself as the beneficiary, because, well, no child yet. My thought process when I started funding the 529 was that if we didn’t have children in the end, I would just use it for myself, maybe go back to study something I really wanted to in my older age or gift it to another family member. I also didn’t plan on maximizing the entire plan, just put enough to get started and pay a few semesters. Being in the FI community has already taught me so much about figuring out how to reduce student loan debt in the end and even eliminate it completely. While my parents were very focused on making sure their kids had an education, I’ve come to the conclusion that not all higher education is equal and it definitely does not need to cost an arm and a leg to get that degree.
My personal experience which included getting my Master’s paid for by an employer, working while in school and knowing how much interest rates really cost you has helped me establish a good foundation for financial independence so it’s good to be in the FI community because each day I’m learning so many things to pass on to the next generation.
I think we will be ramping up contributions early on while the child is still young barring any other expenses to allow the account to grow a bit more. I’ve also been learning and practicing minimalism for a few years now so we’ve been diligent about limiting what we buy for the baby and communicating to family and friends that in lieu of gifts, that a contribution to a 529 account will be more appreciated. Fidelity allows you to create a Gift Page and a Private Account Dashboard to make it easier for family and friends to submit their gift and I like that it tracks so that you can say “Thank You” in the future.
So I’m glad I made this move years ago, even if it seemed crazy at the time. While we still have a long way to contribute, at least we’ve started and sometimes knowing you’ve started provides great peace of mind.