Help! I Opened a 529 Before I Had a Kid.
Did I make a mistake?
There is a particular financial nightmare that haunts me: sometime in the future, I’m unable to save for college for my hypothetical child. My — again, imaginary — child is accepted to a fancy private college, and while I’m so proud, I also don’t have enough saved to cover the tuition. My spawn takes out large student loans and switches majors halfway through junior year to something unprofitable, such as journalism (hi!). Neither my husband, my child, nor I can pay off the debt, and my kid can’t find a job. I never retire because I use everything in my 401k to pay off the student loans. My husband similarly never retires. Our entire family dies penniless in a gutter. I wake up screaming.
I don’t have children yet. And though I really want a family in the future, I haven’t started thinking about when I might start one. So I don’t have to worry — or do I?
The evening before I turned 28, deep in a what-am-I-doing-on-this-planet panic, I started researching the costs of raising a child and sending said child to college. Here is the stat the freaked me out the most: The College Board, a nonprofit that prepares students for higher education, estimates that in 20 years, it will cost $245,269 for four years of public, in-state university tuition — the cheapest four-year option calculated. (Today it costs $21,447 annually.)
Spooked, I turned to researching ways to save for college and found information on 529 plans. A 529 is an investment account that can be used to pay for college — and only college, unless you want to incur a 10 percent penalty. It’s named for a section in the Internal Revenue Code. States have different 529 plans, and you don’t have to live in the state whose plan you participate in.
Reading through New York State’s 529 plan, it sounded like a good deal: The money in my account grows deferred from federal and state income tax, and if I make distributions to pay for qualified education expenses (tuition, books, supplies, a laptop), I won’t pay federal or state income tax on the withdrawals.
You are allowed to open a 529 with your Social Security number, name yourself as the beneficiary, and change the beneficiary at any time, I learned. And then an idea hit me. I know what happens when you start saving for college too late in the game. But what, I wondered, would happen if I started saving ultra early? Not just when my future child is born, but rather, before I even think of planning to conceive him or her. If I opened a 529 account now, I could start saving for college 25 years before my hypothetical progeny graduates high school.
I know what happens when you start saving for college too late. But what would happen if I started saving ultra early?
And so, with a few clicks and $25, I opened an account in my name for an unplanned, not-even-thought-of-yet future collegiate. “You’re so smart,” I congratulated myself. “You’re going to save ALL the money.”
No sooner than the email welcoming me to the plan hit my inbox did questions pop up in my mind. Did I shoot myself in the foot when I opened a college savings plan for a child I don’t have? Would my money be better used for something else? Or better off in a different investment account?
I needed an expert opinion, so I talked to Margaret A. Munro, a tax consultant and author of the book 529 & Other College Savings Plans for Dummies. What follows is our conversation.
Have you heard of other people opening 529 accounts for unborn children? Please tell me I’m not your first.
I have. I haven’t heard of many people who have done it, but I do know that there are people out there who do.
Did I make a big mistake?
No, you didn’t, because you’re learning something. But when you told me you opened a 529 before having a child, I thought, “Well, we’ll have a talk.” Because you could end up not having kids! That happens sometimes.
I figured I could always use the money to pay for continuing-education classes for myself if I didn’t have kids. The cost is so daunting.
It’s scary, and I do think it’s true that you might not be able to save as much as your parents did for you. But there are still really good values out there, all kinds of places that are less costly where you can still get an excellent education.
One criticism I’ve read about 529s is that they really only benefit the wealthy, because the way the plans are designed, someone can contribute up to $14,000 per beneficiary per year and avoid the federal gift tax.
I could always see the reasoning behind 529s as highly specialized products that work for high-net-worth people. But for the everyday Joe out there, I never could see how this was such a great product for them. It’s not a popular thing to bring up, but I do feel a responsibility to say that this is not a perfect product. It’s always sold as “Oh, my God, what a brilliant way to pay for college,” but at this stage, you don’t even know if you are going to need to save for college. Plus, there are many other places you should be saving money right now. If you’re not wealthy and you’re funding a 529 at a high level then you’re not funneling money into your retirement accounts, your savings, or your emergency-fund savings. You’re not going to be able to save in all of those buckets — that’s unrealistic.
For the everyday Joe, I never could see how [a 529] was such a great product.
So before opening a 529, make sure you’re saving enough for retirement.
You should be maxing out your 401k. If you can’t do that, at least contribute the minimum you need to get the matching funds from your company — don’t leave free money on the table. And you should have six months’ worth of living expenses in an emergency fund.
Another criticism is that 529 fees are high. But the one for mine is only $1.60 for every $1,000 I contribute. That doesn’t seem high.
There are a lot of fees buried inside the account. You are only allowed to invest in a limited number of mutual funds, which are chosen by the plan, so there is a fee to run the account and a fee for the mutual fund. The problem is that you are paying so much in fees that you are not building as much compound interest as they would have you believe. The fact is that this a profit center for these companies. They are doing it for their bottom line.
OK, now I know: A 529 isn’t right for me. Where should I be saving up instead?
If you’re currently not earning a whole lot, I would go the Roth IRA route [because you can use that money to pay for college or retirement]. Max out your Roth, and then, if you have any other money that you’re in a position to be saving, take it and invest it conservatively in an investment account until you build up enough to start seriously talking to an adviser about where to put it.
What else should I be doing to build savings?
You should start saving consistently. That’s more important than the amount you’re saving. When you hit your peak earning years, and you’re not in the habit of saving, you’ll find that you have places to spend every penny you’re making. If you’re only spending some of what you’re earning, then as you hit your peak earning years, the amount that you save is going to go up because you’re in the habit.
Worst-case future scenario: My kid is going to start college in a couple of years and I’ve saved nothing. What do I do?
It’s better to start late than not start at all. Anything saved is better than nothing saved because every dollar that you manage to save is a dollar less that you have to borrow. It’s also important, if you have kids starting to get close to college and you don’t have the requisite amount saved, to look at how to turn this child into an independent person, because he or she will get more need-based aid that way.
Your son will graduate college in December. In retrospect, is there anything you wish you had done differently when you saved for his college education?
I had a plan, and when my son was 14, it got sort of thrown off. But I said, “Well, everyone else figures this out, so I will too.” I thought I would throw myself at the mercy of the financial aid department and say, “Look, this is what we had planned, and this is what has happened, and please help us out.” And his school was extraordinarily generous.
If you’ve got a child who really needs to go to school, but you’re not in the position to pay for all of it, be honest about that, and why the school should care. People are ashamed to do it, to be public about their finances — no one ever wants to be the one to say, “I need help. I can’t do this by myself.” We have to do a better job of divorcing ourselves from that stigma.
One thing that this experience has taught me is to ask for help understanding financial matters early, because I did the exact wrong thing by opening a 529.
I think it’s not bad to keep the 529 as an experiment; I did mine more or less as an experiment. It paid for a semester of my husband’s master degree and it paid for a lot of books for my son, but the market is doing so poorly that money I put away is worth less now than when I put it away. Overall, I wouldn’t say that I’ve lost, but I wouldn’t say I’ve gained, either.
One thing you could do would be to find a good financial adviser, whether it’s your tax person, your attorney, or a regular financial adviser. Someone in the same stage of life as you are is often a good person to consult because he or she will bring a lot of personal experience to the table. Your parents’ financial person is not the best to go to. It’s like going to your mother’s gynecologist — not fun. And you have to remember: The minute you have kids, you’re not going to be rich anyway.
Amanda Woytus is a writer and editor living in Brooklyn.
