You’re giving my 1 year old a what?
We have one little one at home with aspirations for at least one more. The little one, Junior, is very fortunate in that he has all 4 grandparents living, healthy, and pretty well-off financially. Junior is nearly a year old. When we had him, one set of grandparents gave us a check for $1000 with the only string being that it was for Junior, not for us. It was to be set aside for him for future use. Well, what do you do when someone gives your newborn money that is intended to be his and his alone?
I think the grandparent’s intention was a college fund, and that’s valid since college is expensive in the United States and I can only imagine the next 20 years won’t change that. The most obvious way to accomplish college funding is to open up an Education Savings Account (ESA) or a 529. 529s are generally run by the state where you are, but there are a couple big ones that don’t require you to reside in a specific state. Vanguard has a highly touted 529 that is technically a Nevada 529, but you don’t have to be a Nevadan to use it. Vanguard is often recommended due to the investment options and low fees it offers. Fidelity also offers an array of 529 options including one for Arizona, Connecticut, and some national options. Note that just because it is an Arizona plan, may not mean you have to live in Arizona, but some plans may have residential requirements.
The pros to the 529 are it is tax advantaged as long as you use the funds for educational expenses, and it keeps a wall between you and your child’s bucket of money for when they come to you with puppy eyes about wanting to go to the University of Miami and drink their way to graduation. The cons are that your kid might not go to college. Looking at that googly eyed munchkin at the dinner table with sweet potatoes plastered all over his face has no bearing on whether he will have the stuff to be a brainiac or not. However, college having the price tag that it does requires planning from the very beginning, if you desire to provide that for your children. Wife and I both graduated undergrad debt free in 2016 and 2013, respectively, and it is the single biggest boost we had to the startup called adulthood, so we are committed to providing the same opportunity. The other major con the 529 has is it shows up on the FAFSA. We will talk about that later.
Now, the 529 does what it is designed to do really well: help your savings grow for 18 years to an amount sufficient to pay the college price tag. Many financial gurus and folks way smarter than me tout them all day long and with some good reasons. However, the 529 boxes that money up into a corner that can be costly to undo.
We hope our kid(s) go to college, study something lucrative, and then get off our payroll ASAP just like any middle-class parents do. But 20 years is a long time. Junior may end up with more aptitude to be an EV mechanic, or a plumber, or a circus clown, or a pilot. All of which require way less capital than a 4 year diploma from a state school. So how do you know how much to put in the 529 to make sure you don’t waste a lot of it on the 10% penalty for using the money for your midlife crisis? You can pass unused funds in the 529 to another dependent but there’s pesky paperwork.
And let’s not forget the other part of the equation. As much as Junior may change in 20 years, the Education system may change as well. It could get cheaper (I won’t hold my breath), it may collapse, or it may reform into something that looks incredibly different than hours in a lecture hall watching Uncle Suede draw hydrocarbons on the board. Who knows! So Flexibility, and adaptability is important to us.
So, for college, we are basically calling our Roth IRAs the college fund for a couple reasons. 1. The $12000 contribution is more than enough to grow into several 4 year degrees worth of capital (from a state school). Current rates in my state put a 4-year degree in the ballpark of $50k (10k x 4 years + another 10k for hidden fees). 2. The Roth IRA has even more tax-advantages than the 529. 3. I can use the IRA for whatever I want. If Junior becomes a pilot for only 20k I have no worries. And to be honest, our IRAs already have 50k in each and Junior isn’t even out of diapers, so we will have plenty in there. 4. The IRA is my money, and isn’t included on the FAFSA as part of the Expected Family Contribution (EFC) so it also serves as a way to hide my wealth from the university.
So, what did we end up doing with the $1000 since we already have college funds planned out? We opened up a Custodial Account (UGMA/UTMA) with Fidelity. The money belongs to Junior and has to be given freely to him before he turns 25. But until then it can be invested the same as any other Fidelity account. He can use it to buy a car, get married, buy booze in college, backpack Europe, or he can use it as seed capital to FIRE himself. For now, I manage the investments and everything, but this account also makes a perfect resource to teach a personal finance and investing education with Junior down the road.
