Investing in education (529 plans)

I enjoy investing and ever since I came to live in a capitalist country, I’ve been hooked. That said, even when I lived in a communist country, I knew that the most important investment one could make is in education. Education can set you up not only for a more lucrative career, but also for a more informed and interesting life. My parents invested everything they had in my education and I benefited from that investment mightily. So, as soon as my kids received their social security numbers, soon after birth, I set up their 529 plans.

I looked at different options (e.g. custodial accounts, etc.), but ultimately thought that setting up a Vanguard 529 plan was the simplest and best thing to do. Basically, you can put away money that can only be used for education related expenses, but if you use that for education expenses, you don’t have to pay federal taxes on the gains from those investments (some states also give you a tax break). So, if you plan to pay for education at some point and you believe that investing money will produce better financial results than keeping it under your mattress, this could be something for you to consider.

For a married couple, you can automate your plan to add $2,500 per child per month, without hitting the gift tax (this number could change year to year). Whatever the amount you choose, I recommend automating it so that you are constantly investing in the future and don’t let human nature get in the way.

You have to be careful to not over invest because these funds can only be used for education, although they don’t have to be used for the originally intended recipient (you can change to another child or to a grandchild, yourself, etc).

The way I look at it: Education costs are not going away and they will probably only increase. Moreover, you can now use these funds to pay for kindergarten and up (not just college expenses), so it may make sense to put away more than you originally thought if you plan to send your kids to a private school.

A nice advantage of the 529 plans over some other education savings options is that the owner of the account maintains control and can move the money to someone else at any point. That means the beneficiary can’t just go and spend this money on whatever they want. Also, and probably because of this, this type of account doesn’t reflect as poorly on financial aid applications as some other options that make the money look more like they belong to the student asking for financial aid (e.g. grandparents opening up a savings account in the name of their grandchild is worse for financial aid purposes).

The only question in my mind is whether to begin to take some of this money out when kids are in elementary school, etc. on one hand, I want the money to keep growing and compounding for college years. On the other hand, K-12 now costs per year close to what college costs (in the San Francisco Bay Area), so it might be helpful to leverage some of this money earlier than college. Ultimately, I think it depends on your specific financial situation and how much money you need during the K-12 years.