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Wednesday, December 28, 2016

Why I continue to Fund a 529 Plan My Daughters will Probably Not Need.

I loved everything about college except the cost. A price, that I didn't truly understand until  nearly two decades of monthly payments. A good chunk of those payments went to interest. To this date we're still paying my wife's college loans. I have to say as the years have passed college has felt more and more like indentured servitude.

This was the legacy I wanted for my children. So when my oldest daughter was born I vowed, that even though I didn't have much, I would start saving early and continuously. That I would up the amount whenever possible. It took me bout 8 months to recover from life after bringing home a child and finding the right place to save. I settled on the New York 529 Direct Plan through NYSaves based on its performance and low fees.

I started funding just $25 a month.  Every couple months I added $5-10 to my payment. Additionally when family sent my daughter money for her birthday, I deposited every dollar into the fund.  A couple months before my daughters third birthday I had close to 4k saved. It wasn't much, but given the budget I was on I was proud of the discipline it took to save that much.

Then I received some fantastic news. My mother just came into a large sum of money and she wanted to do something for my daughters. (Our youngest was just born). She was going to setup two 529s of her own with a significant enough of a lump sum that the girls wouldn't have to worry about college. For my mother this was a legacy for her to leave to her grandchildren. She is battling cancer and one of her biggest fears is that the girls won't remember her. It also is some relief for my wife and I that we won't have to worry about putting two children through school with our own retirement looming.

It was a fantastic gift. But it left me with a dilemma. What about the account I started? Do I continue to fund it?  I had a lot of other savings goals. There was retirement, a house, paying down my wife's student loan. And I was starting to look into dividend growth investing. I simply have a lot of buckets that I wanted to put money into and not enough money to take from.

After thinking long and hard I decided to drop the amount to $25 a month but to continue to fund my oldest daughters 529 plan. Here are the four reasons behind it.

1. What if the market doesn't do what it is supposed to do? If the market performs like it is supposed to over the next two decades my girls should be fine. But there are no guarantees. Since the money went in as a lump sum when the market was doing well, I feel it is a little more vulnerable to a single bad event.

2. Can't project the future: College costs are out of control. My mom put away more money than I could have imagined saving. But if prices continue to rise, there is a chance that they may even price out of her savings. Also if one of them get into an Ivy school or wanted to go to an expensive graduate program, they may need more than what has been put away from them. 

3.   The legacy: The great thing about a 529 is that it is transferable. So if my daughter didn't end up exceeding what my mother put away from them it could be used for grandchildren. The idea of potentially allowing money to grow tax free for a grandchild decades before they're born is beyond exciting.

4. Very little downside: Suppose my kids don't end up needing the money for school. The worst that would happen is that I give it to them and they have to pay regular taxes and a 10 percent penalty. If I let my girls take the money our during say their senior year, they will be in a very low tax bracket anyway. And the money will have tax free for decades. It would essentially be like my 403b plan only with low fees.


  1. No matter what happens with the 529 you did good. Even if it doesn't go towards college you are being a responsible parent by assisting your child. I opened a custodial account for baby DivHut when he was born last year. If more parents put aside, even modest amounts of cash, we'd have more financially fit young adults.

    1. Keith,

      I totally agree. In the early 80s my dad spent $500 on a savings bond. He gave it to me when I graduated college. It was worth over 2k. Had he simply made that investment each year it would have paid for at least one year of school for less than $42 per month.I read your post about the custodial account a few months back. I think it's a fantastic approach.


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