Stocks — Part XXIX: How to save money for college. Or not.

Ever since I published this post — Why I don’t like Investment Advisors — people have somehow gotten it into their heads that I don’t like investment advisors. Go figure.

And ever since he first interviewed me on his podcast, Radical Personal Finance, my financial planner pal Joshua takes me to task for this. He assures me, with great passion, there are many good, competent and honest advisors who genuinely put the needs of their clients ahead of their own. Joshua knows this because he is one and, not surprisingly, he hangs out with others in the profession who are as well. This colors his view.

I, on the other hand, am routinely regaled with mistreatment horror stories about advisors from my readers and friends. Stories that range from the grossly incompetent to the purely self interested to the outright fraudulent.

This colors mine, and even Joshua concedes it is a profession that attracts some of the worst sorts and finding one of the good sorts can be a challenge. Not terribly surprising when you consider it is a profession that gives access to the life savings of potential marks, er, customers.

That said, when they are good they are invaluable resources. Especially when they are deeply knowledgable and wicked smart.

My other pal Matt, of Mom and Dad Money, is one such. (That link, BTW, will take you to his recent post on “Uncertainty.” A great read on an important concept.)

Tools for college saving

More and more frequently in the comments here I get asked about the tools specifically designed to help parents save for college. While I’ve answered as best I can, it has been a long time now since we saved for our own daughter’s education and I’m just not all that interested in keeping up on the subject.

So I was delighted when recently Matt put up a series of posts on college savings plans:

  • Reasons NOT to use them
  • Reasons TO use them
  • and How to choose

These posts were comprehensive, very well done and solved my problem. I simply created Addendum #3 in my post The College Conundrum, linked to them and started sending people there.

But the more I thought about it, the more important this issue seemed. Paying for college is, after all, an increasingly challenging financial task. It needed its own post here and in Matt I’d found just the guy to write it. Fortunately, he graciously agreed.

As you’ll see, he not only takes you thru all the savings options and tools, he also presents entirely new concepts and approaches most have never even considered.

Here it is.

Thanks, Matt!!

Everything You Need to Know About Saving (or Not!) for College

by Matt Becker

college 5

You have to start saving for college as soon as you have kids, right?

That’s how most of the parents I work with feel when they first come to me. And it’s an admirable sentiment. It comes from caring about their children’s future and wanting to provide them with all the opportunity in the world.

It’s also a feeling I know well. One of the first things I did for both of my boys was open a 529 plan and start making small monthly contributions.

But as a financial planner, it’s usually my job to pump the brakes a little bit.

Because while saving for college is a fantastic goal, it’s almost never the most important one. And even if you have all the money in the world, there are good reasons to consider alternative approaches that can open up even more opportunities for you and your children.

In this post we’ll get into all of that and more. Here’s what we’ll cover:

  • Why you should consider NOT saving for college
  • When saving for college IS a good idea
  • How to save for your child’s future as efficiently as possible

Let’s dive in!

5 Reasons Why You Shouldn’t Save for College

5 good reasons not to use a college savings account

It may be that the smartest financial decision you can make is to not save for college at all, at least in the traditional way.

Here are five of the biggest reasons why that’s true.

1. Other financial priorities are more important

In an ideal world you would have plenty of money to help your child pursue whatever opportunities she wanted. In other words, having the money to pay for college (or anything else) is preferable to not having it.

But most of us don’t have unlimited resources. Most of us have a finite amount of money and we have to make tough decisions about how to prioritize it.

And from a purely logical standpoint, it almost always makes sense to prioritize a number of other financial goals over saving for college.

To start, there are many ways to pay for college that don’t involve a huge amount of savings, including:

  • Paying from cash flow (like any other bill)
  • Taking on student loans (potentially high ROI if done thoughtfully)
  • Applying for scholarships and grants
  • Taking a less expensive route through college
  • Having your child work part-time to help with the cost

Other financial goals don’t have that luxury. Most of them are either dependent on your ability to save or require you to spend money on them now.

Here’s a list of financial goals I typically encourage my clients to prioritize over saving for college:

  • Retirement/financial independence
  • Emergency fund
  • Life and disability insurance
  • Estate planning
  • Paying off debt

Even beyond that list, you may want to put goals like traveling, buying a house, or starting a business before saving for college, if those things are important to you. Because again, those things will only happen if you dedicate money to them now.

2. Give your child skin in the game

I said above that in an ideal world you would have plenty of money to help your child pursue whatever opportunities he wanted.

But maybe you don’t think that’s true. Maybe you would prefer for your child to have some skin in the game when it comes to education.

There’s nothing like having to put money on the table to make a person take something seriously. Your child may end up getting much more out of college if he is required to invest in it himself.

3. The tax benefits may be small

The tax benefits of dedicated college savings accounts are often overstated.

Let’s say you save $100 per month for college from the day your daughter is born until the day she turns 19. And let’s say you earn a 4% annual return on that money over those 19 years, representing a mix of aggressive investments when your child is young and conservative investments as she nears college.

In a 529 savings account, where your money grows tax-free and can be used tax-free for qualified higher education expenses (more on that below), you would have $34,181 to put towards your daughter’s college education.

In a regular investment account with a 15% tax rate on earnings (for simplicity’s sake), you would have $32,474.

That means you would save $1,707 on taxes by using a college savings account. Not insignificant. But probably not life-altering either.

And it comes at the cost of that money being subject to extra taxes and penalties if it’s not used for higher education.

Quick note: The savings will be greater if you live in a state that offers an income tax deduction for contributions. That should definitely factor into your decision.

4. What will college look like in 10-20 years?

I honestly have no idea what higher education will look like in 14 years when my oldest son is 18.

Will it be astronomically expensive, as recent trends would indicate?

Will it be free?

Will online learning be the norm? Or will it at least push down the cost?

Will it make more sense to start a business or get an apprenticeship?

With all of that uncertainty, there’s a level of risk in putting a significant amount of money into an account that’s primarily meant for only one of those scenarios.

5. You can invest in your children now

Joshua Sheats, a financial planner himself, has a fantastic podcast episode on this exact topic, explaining all of the reasons why he personally is not saving for his children’s college education.

My favorite reason is that college is a small four year window in your child’s life. Why would you divert so many of your resources to that small window when you have 18+ years before then to help your child build skills and interests that will serve him well for his entire life?

How about using that money to travel to new places that expand his understanding of people and cultures? What about spending it on activities and coaching that develop core skills nurture his biggest interests? What about helping him fund a small business so he can learn what it takes to produce something of value and create his own financial resources?

Or how about this: build up your own F-You money so that you have time to spend with him. After all, there’s nothing a child needs more than quality time with his parents.

There are many ways to invest in your child’s future. College is simply one of them.

4 Good Reasons to Save for College

5 good reasons to use a college savings account

All of that makes saving for college sound like a pretty bad idea, doesn’t it?

Of course that’s not the case. There are plenty of situations where it makes sense and where the benefits a dedicated college savings account can be significant.

Here are four reasons why saving for college can be a good idea.

1. Other financial priorities are handled

Let’s say that you’re on track for retirement, you have a strong emergency fund, good insurance, a solid estate plan, no debt, and you’re even able to enjoy yourself from time to time.

If you have extra money to put somewhere, what should you do with it?

There’s no right answer to this question since it really depends on your personal goals and values. But investing in your child’s future is certainly a worthy cause.

2. You can contribute a lot of money early on

If you can contribute a significant amount of money early in your child’s life, the tax benefits of a dedicated college savings account can be substantial.

Let’s say you can save $500 per month for college. Using all of the same assumptions we did earlier you’ll end up with $8,536 more in a college savings account over a regular investment account because of the tax breaks.

And to get even more extreme, let’s say that you and your spouse save $28,000 per year (the maximum you can contribute in most cases without triggering the gift tax) for the first five years of your child’s life and then stop contributing.

In a dedicated college savings account you would have $273,126 of tax-free money to put towards your child’s education. In a regular investment account it would be approximately $253,157 after-tax. That extra $19,969 would certainly come in handy.

3. You place a high value on traditional college education

You can follow all the financial “rules” you want, but in the end your money will only bring you happiness if you use it on things you value.

If having the ability to pay for your child’s college education is one of those things, then this is a fantastic use for your money. Not only are you providing your child with the gift of choice, but you’re increasing your own happiness in the process.

4. Flexibility

Most college savings accounts are fairly flexible. You can use the money on a traditional undergraduate degree, advanced degrees like a master’s or doctorate, and even certificate programs like the one for the CERTIFIED FINANCIAL PLANNERTM certification.

And if one child doesn’t end up needed the money, you can use it for a different child. Or for yourself, or a spouse, or a niece or nephew, or a grandchild.

So while there are restrictions around college savings accounts, they are also more flexible than you might think. There will almost always be a way to put the money to good use.

How to save for your child’s future

how to choose the best college savings account - cropped

If you’d like to start saving for your child’s future, whether that’s college or something else, what’s the best way to do it?

Here’s an overview of the different types of accounts available to you and the pros and cons of each one.

Traditional college savings accounts

529 plans

529 plans are what most people think of when it comes to saving for college, and for good reason. They offer some pretty significant tax benefits in the right situations.

From a tax perspective, 529 plans work much like Roth IRAs but for college instead of retirement. Money you contribute grows tax-deferred while inside the account and can be withdrawn tax-free for qualified higher education expenses.

Some states even offer a state income tax deduction for contributions if you use your home state’s plan (there is never a federal income tax deduction).

Another big benefit is that there are NO income restrictions to prevent you from using them. They are open to everyone.

And you can contribute a lot of money.

Most plans have a maximum cumulative contribution of several hundred thousand dollars that most people will never get near. On an annual basis your contribution is only limited by your willingness to exceed the annual gift tax limit. For 2016 that limit is $14,000, which means that you could contribute $14,000 for each of your children without any gift tax consequences. For a couple it’s $28,000 per child.

There’s even a special 5 year election rule that allows couples to contribute up to $140,000 in a single year if you’d like.

The biggest downside to 529 plans is that if the money is withdrawn for any purpose other than higher education, the earnings are taxed as ordinary income and subject to a 10% penalty.

The other downside is that you’re limited to the investment options within the 529 plan, and some states offer some pretty dreadful choices.

The good news is that you’re under no obligation to use your state’s plan. To check other options, Morningstar produces an annual ranking comparing various 529 plans.

When I work with clients, I always check their home state’s first to see what tax benefits it offers. But if there aren’t any in-state benefits, my go-to recommendations are usually New York, Utah, and Michigan.

Coverdell ESA

A Coverdell ESA is a lot like a 529 plan in that it offers tax-deferred growth and tax-free withdrawals for education expenses.

The big advantage of a Coverdell ESA is that the money can also be used tax-free for K-12 expenses. So if you want to enroll your child in private school or even pay for some tutoring, a Coverdell can help.

The big downside is that you’re limited to a maximum per child contribution of $2,000 per year and there are income restrictions that prevent higher earners from using these accounts at all.

Here’s a list of providers that offer Coverdell ESAs.


You CAN contribute to both a 529 plan and Coverdell ESA, assuming that you’re within the Coverdell income limits. Keep in mind though that those contributions are combined for the purposes of the annual $14,000 gift tax exclusion.

From JLC – Note 2:

For more on Coverdells, check out this conversation from the comments below. It also touches on 529 plans and UGMA/UTMA accounts.

Non-Traditional College Savings Accounts

Regular investment account

A regular investment account doesn’t come with any special tax benefits, but it does offer some other big advantages.

First, you can contribute as much as you want and invest however you want. You have total control.

And second, the money is accessible for any purpose at any time. That means that if life changes and you’re suddenly in need of cash, this money is available to you without any penalties.

It also means that you’re free to use this money to invest in your child in whatever way you see fit. If you want to use it for college, then great! If you want to help them start a business or travel the world, then great! And if you want to use it as F-You money so you can reduce your work hours and spend more time with your family, it’s there for that too.

A regular investment account gives you the most freedom to provide the opportunities YOU want to provide, no matter what they are.

Roth IRA

A Roth IRA combines some of the flexibility of a regular investment account with some of the tax benefits of a college savings account.

  • The money is tax-deferred while inside the account.
  • The amount you’ve contributed can be withdrawn tax and penalty-free at any time for any purpose.
  • The earnings can be withdrawn penalty-free for qualified higher education expenses at any time, though they will be taxed as ordinary income.
  • And of course, if you don’t need the money for college you can simply keep it inside the Roth IRA and use it for retirement.

But there’s another way to use a Roth IRA that can be both a teaching tool AND a fantastic way to invest in your child’s future.

Anyone with earned income can open and contribute to a Roth IRA. That includes children. So why not do something like this:

  1. Encourage your child to find a job or start a mini business.
  2. Maybe even use some of that money you put in a regular investment account to help her get this going 😉
  3. Agree to match some percentage of her earnings with contributions to THEIR Roth IRA.
  4. Invest those contributions together, giving your child hands-on investing experience.
  5. When your child reaches adulthood, she will have a fantastic head start on retirement and it will be directly because of her hard work.

I’m not a fan of…

…using UGMA or UTMA custodial accounts. Here’s why:

  • There are no tax benefits.
  • The money is irrevocably your child’s as soon as you contribute it.
  • They have a negative impact on financial aid.
  • Your child can use the money however they want once they become an adult, which means they may or may not use it for college.

Note from JLC: 

For more on UGMA/UTMA accounts, check out this conversation from the comments below.

The Best Solution for YOUR Personal Goals

Whew! That was a lot. So here’s a quick summary of how I encourage my clients to think about this question of saving for their child’s future.

First, handle other financial priorities like retirement, your emergency fund, insurance, estate planning, and debt.

Then, consider the following questions:

  • What kind of person do you want to raise?
  • What qualities, skills, and values would you like to pass on?
  • What types of opportunities and experiences can help foster those things?
  • How can you best provide those opportunities and experiences?
  • Which financial tools will help you provide those things most efficiently?

If your answers lead to a traditional college savings account, then great!

But there are many options available to you and I would encourage you to be creative about the best solution for YOUR personal goals.


Here’s a link to the spreadsheet used to run the numbers in the scenarios above:

 Matt has also graciously agreed to answer any questions you might have. Ask away in the comment section below!

Course: 10 Weeks to a Better Future

If you are as impressed with Matt’s clarity of thinking and presentation as I am, check out his course. It walks you step-by-step through every major financial decision you have to make as you start your family so that you can stop worrying about money and start using it to build a better life.


Will saving for college impact your child’s eligiblity for financial aid?  (Another great example as to why the comments around here are so valuable and so worth your time.)



Recently I was interviewed by Hahna Kane for the Master Your Money Summit. We had a blast!

Here are some more: As Seen On

What I’ve been reading recently and recommend:

We all know the Wright Brothers invented the airplane. But I, for one, had no idea how compelling a story theirs is. At least as told in this book by Mr. McCullough. Reads like a novel.

One in a series of novels and short stories recounting the adventures of Bertie Wooster and his “gentleman’s gentleman” Jeeves. If you’ve not read Wodehouse, do yourself a favor.

Aging boomers are urged to kill themselves to save the government money. A humorous cross between Jonathan Swift’s “A Modest Proposal” and “House of Cards”

Interestingly, it references Bertie Wooster.

Southern missionary packs up his family and heads to the Congo. It doesn’t go well. Narrated in rotating chapters by his wife and four daughters. Compelling tale very well told. Amazing as the style and tone shifts between her narrators.

True story of a Mexican fisherman blown out into the Pacific Ocean and his survival as he drifts across for, well, 438 days. Reads like the great adventure it is. Amazing to note: All of his supplies are lost in the storm but he comes across enough garbage floating in the ocean to replenish them.

Predicting the future is risky business, but Ross makes an interesting case for how markets are changing and what industries are driving the change. Given the current political debate here in the US, I especially enjoyed his section: The Geography of Future Markets.

More books I’ve enjoyed

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Important Resources

  • Talent Stacker is a resource that I learned about through my work with Jonathan and Brad at ChooseFI, and first heard about Salesforce as a career option in an episode where they featured Bradley Rice on the Podcast. In that episode, Bradley shared how he reached FI quickly thanks to his huge paychecks and discipline in keeping his expenses low. Jonathan teamed up with Bradley to build Talent Stacker, and they have helped more than 1,000 students from all walks of life complete the program and land jobs like clockwork, earning double or even triple their old salaries using a Salesforce certification to break into a no-code tech career.
  • Credit Cards are like chain saws. Incredibly useful. Incredibly dangerous. Resolve to pay in full each month and never carry a balance. Do that and they can be great tools. Here are some of the very best for travel hacking, cash back and small business rewards.
  • Empower is a free tool to manage and evaluate your investments. With great visuals you can track your net worth, asset allocation, and portfolio performance, including costs. At a glance you'll see what's working and what you might want to change. Here's my full review.
  • Betterment is my recommendation for hands-off investors who prefer a DIFM (Do It For Me) approach. It is also a great tool for reaching short-term savings goals. Here is my Betterment Review
  • NewRetirement offers cool tools to help guide you in answering the question: Do I have enough money to retire? And getting started is free. Sign up and you will be offered two paths into their retirement planner. I was also on their podcast and you can check that out here:Video version, Podcast version.
  • Tuft & Needle (T&N) helps me sleep at night. They are a very cool company with a great product. Here’s my review of what we are currently sleeping on: Our Walnut Frame and Mint Mattress.


  1. Tyler says

    I guess because I’m so young and don’t carry any debt I don’t understand the need for estate planning. Although even if I had children, everything would go to them anyway right? Should I write that on a napkin and stick it in a safe somewhere and call it good or do I really need to sit down with legal at work?

    Also I wanted to say that I disagree a bit with the order of priorities (but, in no way am I an expert). I think depending on the type of debt, that should be ordered first above all else as long as a “relatively” solid savings cushion is established. I say relatively because in my instance work is guaranteed until 2020 unless I do something ridiculously stupid(which I’m sure could happen but I’ll do my best to reduce the chances). Therefore my wife and I only have a cushion of ~5,000, which we feel is more than enough while we’re in the process of saving every other dollar we can. I’m sure the order of the list has much more variance than I originally read and just didn’t come out well in the article to me, but I just wanted to throw in my opinion.

    Thanks for writing!

    • Matt Becker says

      Good question Tyler. Estate planning isn’t incredibly important if you’re young and single, though you likely want to double-check your beneficiary designations to make sure everything is going to the right people. It becomes more important once you’re married and essential once you have kids. The reason is that it’s your estate plan that determines not only what money is left for your children, but who is put in charge of that money AND who is put in charge of caring for your children. Those are big, important decisions that you want to decide ahead of time. Here’s a primer specifically for new parents: The Basics of Estate Planning for New Parents.

      Good point about prioritizing as well. The order will absolutely be different for different people depending on the specifics of their situation and their goals. I actually didn’t even list them here in my default order of priority. You can find that here. But in any case you’re absolutely right that there is no one answer here and you need to decide for yourself what’s most important.

    • Jeff D says

      See the post done by Prob8 about estate planning good general overview about what is/isn’t covered with a back of napkin plan

  2. Mr. PIE says

    Insightful, thorough and wonderfully simple. Great post!

    We have been wrestling with this dilemma for a long time. Since starting 529 plans for both our kids 9 years ago when the first was born.

    Coming from the island across the pond we were brought up in an environment and era where university costs were covered by the government. Our parents could not even afford to fund much of our university education if they had to. The whole education costs in the UK is now changing rapidly and moving towards a more USA-like system. We relocated to the US some time ago and have called this great country our home for nearly 18 years.

    Our own situation is that we fund both 529 plans with Vanguard after switching from a not so great former plan recommended by our (now fired) advisor. Our experiences of a financial advisor will be subject of an upcoming post at our new blog. We have about 75% of costs covered (we think) for each kid at a 4yr state school and have now ratcheted back the monthly deposit. We pump the difference into taxable account at Vanguard in funds such as VTSAX, VWIAX.

    We hope to reach our FIRE goal in less than three years . The plan is nicely on track and could come earlier. Both kids will then be 10 and 12. And we can’t agree more on the time , energy and freedom we will then have to help their education in things that they are passionate about.

    • Matt Becker says

      Thanks Mr. PIE! And fantastic work putting yourself in such a great position. Those 6-8 years of financial freedom before your children head to school (or not 🙂 is going to be priceless for all of you. Good luck with the rest of your journey!

  3. DraggonFIRE says

    Just a couple of notes from recent, first-hand experience….

    I started saving for my two kids’ college education shortly after their births. Initially, I used the UTMA option on the advice of one of those (ugh – but no offense Matt!) financial planners. Luckily, we wised up and dumped the financial planner after a couple of years of questionable advice. We then redirected college savings into Educational IRA accounts – subsequently relabeled as Coverdell Education Savings Account. At the time we made that decision, I am certain I checked on the ability to reclaim the funds if things didn’t work out as planned, but either I misunderstood something or something has changed as now these plans are considered to be owned by the Beneficiary (the student) unless the Responsible Individual (usually a parent) purposefully reassigns the account to another qualifying family member before the initial Beneficiary turns 30.

    For this reason, I would put the Coverdell in the same category as the UGMA/UTMA – i.e. NOT a fan. Saving for college is a noble goal, but you really have no idea how your kids are going to turn out. My two are decent, but have shown way too much irresponsibility, laziness and ingratitude. They have both lost scholarships due to poor academic performance and have made other poor life choices that leave me wondering who raised these kids. My son is recently showing very positive signs of turning things around since I followed through on my “threat” to stop paying for school after his third “strike”. Once he started paying for it himself, as Matt mentions in the article, he developed a whole new appreciation for money and his college education. My daughter, on the other hand, still has some maturing to do.

    This is just a long-winded way of agreeing that, for the majority of people, saving in a regular brokerage account is likely the best way to save for college with the least complications. Yes, you might miss out on some minor tax savings, but the peace of mind if plans change or your kids suddenly turn into total strangers, is priceless.

    • Matt Becker says

      Thanks for sharing your experience. It’s a great example of how injecting a little bit of personal responsibility can really change things.

      As for the Coverdell ESA, the rules have changed over the years and to be quite honest I’m not 100% sure how they were treated as much as 5 or more years ago. But at this point they function in most ways just like a 529 plan. You can change the beneficiary to another family member and you CAN withdraw the money for non-education purposes, though the earnings will be taxed and subject to a 10% penalty.

      You are right that there’s an additional rule saying that the money must be withdrawn by the time the beneficiary reaches 30. Otherwise the money will automatically be distributed and subject to that same tax + penalty. Of course, you can always change the beneficiary before that point.

      • DraggonFIRE says

        “you CAN withdraw the money for non-education purposes, though the earnings will be taxed and subject to a 10% penalty.”

        True enough, but the earnings part of the withdrawal actually hits the Beneficiary’s taxable income (along with the 10% penalty) and the entire amount of the withdrawal legally belongs to him/her. That’s why I equated it with the UGMA/UTMA – i.e. the irrevocable gift (pursuant to a Beneficiary change which at least gives you some options).

        • Matt Becker says

          This is a great conversation and I’m glad you’re bringing it up (I keep telling Jim his readers are wicked smart). And FYI I am not a tax expert and don’t pretend to be. I would be interesting to get a CPA’s take on this.

          Reading IRS Publication 970 (because who doesn’t love reading IRS publications?) you are correct that taxable withdrawals from a Coverdell ESA are attributed to the beneficiary. Which in many cases would (I think) result in a lower tax bill because of the $2,100 exception before the Kiddie Tax kicks in. Again, not a tax expert though so I’m not 100% sure about that. Also, it appears that the same would be true for taxable 529 plan distributions made to the beneficiary. See here.

          In terms of how you’re allowed to use the money, I’m honestly not sure of the precise rules here, for the Coverdell or the 529 plan, and wasn’t able to find anything concrete. Do you have a reference? I’m asking because it would be helpful for my future reference, not to double-check your assertion.

          In any case, you could always rename yourself as beneficiary and take the money out that way, which you cannot do with a UTMA or UGMA account. So I do feel like there is more flexibility.

          • DraggonFire says

            Well – that’s a real bummer. Just spent that last 45 minutes composing a reply only to have it eaten when I submitted it. Here’s a much condensed version… 🙂

            “In terms of how you’re allowed to use the money, I’m honestly not sure of the precise rules here, for the Coverdell or the 529 plan, and wasn’t able to find anything concrete. Do you have a reference?”

            Interestingly enough, from the same source you linked to, here’s some info that contradicts whom the account can pay out to:

            Control of the ESA

            Also, within Pub 970, there are some clues. The definition of Coverdell vs 529 is one such:

            What Is a Coverdell ESA? A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary

            What Is a Qualified Tuition Program (i.e. 529)? A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student’s qualified education expenses

            Notice that the Coverdell uses hairy legal words like “trust”, “custodial” and “designated beneficiary” that the 529 definition doesn’t.

            “In any case, you could always rename yourself as beneficiary and take the money out that way”

            True, so long as you plan to still be under 30 (the age limit for the beneficiary of these accounts) when your kids give you reason to consider doing this… 🙂

            To be clear, I’m not the Scrooge, and I want the best for my kids. But dumping a decent-sized pile of money in their laps when they display little responsibility currently doesn’t seem like a prudent thing to do. So, I’ll continue to coach and observe and dole it out legally for school expenses as they occur. Should there be a chunk left, I’ll likely dole it out over 2-3 years as they approach age 30 to make the tax hit to them less impactful.

          • Matt Becker says

            All good points. Thank you for the clarification and for pointing out some helpful resources. Clearly I still have some things to learn here too 🙂

            Jim, might be worth adding an update to the Coverdell section with some of the points DraggonFire has made? I’ll leave that up to you.

          • jlcollinsnh says


            I just put a note with a link to this conversation in the Coverdell section of the post.

            Great discussion, guys!

    • jlcollinsnh says

      Don’t feel too bad, D-FIRE….

      I made the same UGMA/UTMA mistake when our daughter was young. And it was a total DIY project, so I don’t even have a financial planner to blame. 😉

  4. DIY Money Guy says

    Great read and very timely article for my family! My wife and I have 10 month old twin daughters this has been a recent topic of discussion for us. We recently rolled my wife’s old Kansas 529 to New York’s 529 program to take advantage of the low fees in their Vanguard funds. But to your point in the article there are several ways to save for education and there is not always a one size fits all solution for everyone. My sister and several friends have young children and have asked me about this too. I’ll refer them to this article. Thanks for consolidating all this information into one place in an easy format to read.

    • Matt Becker says

      Good stuff! Assuming you live in Kansas, you’re actually in a great situation in that Kansas is one of the few states that gives you an income tax deduction for 529 plan contributions no matter which plan you contribute to. So you get the best of both worlds with the opportunity to use a low-cost plan like New York’s AND get the extra tax break. Pretty cool!

  5. Fervent Finance says

    Great run down – thanks! I have friends who are becoming parents and they ask me my take on the subject quite often. I usually make sure their other priorities are taken care of and then point them in the direction of their brokerage account or 529 (depending on scenario).

  6. Jana says

    My kids had between $8000-10,000 in their college funds when they got to college age. For our family we decided it would be better to have a stay at home mom than to have a large college fund. Here’s how each son got through college debt free.
    1. Our kids were spaced out by 2 years so we decide how much we could contribute without stopping our other goals and without eating beans and rice every night. We decided on $500 a month with a total cap at $18,000 each.

    2. The first son decided on a private school across the country that was $40,000+ a year. He used most of his money from us for travel and some housing. He applied for the Army ROTC program and was accepted for full tuition. They not only covered all his tuition but books and a stipend on top of that. He’s now an officer and in the reserves to “pay back” this benefit while he works full time for the governement. He worked hard during college but he got the education he wanted without debt.

    3. The second son decided on Community College and the State University. He took CC classes while in high school. In California it’s free for high school students so he picked up several units. He worked part time, bank rolled the rest of his college expenses, graduated in 3 years(+summers) and used his college money from us as a down payment on a studio condo. He lives at home-pays us rent and leases out the condo. He pays virtually no income taxes.

    I let my kids know early on that we would not be paying for college but we would help them find a way to go that worked for them. I’m glad it worked out. And I think even without the money from us it would have worked for them. I do wish we had the money to just pay for it but I know that we would be able to be generous to them in retirement because we didn’t spend all that money on college

    • Matt Becker says

      What a great story! Thank you for sharing Jana.

      I particularly love this line: “For our family we decided it would be better to have a stay at home mom than to have a large college fund.”

      I think it’s easy to get caught up in all the financial advice out there and get stuck always trying to do the next thing you’re “supposed to do”. I love that you guys took a step back and first considered the lifestyle you wanted and then made your financial decisions accordingly. That’s fantastic.

    • jlcollinsnh says

      I agree, great story Jana and I love that line as well.

      When our daughter was ~2 we made the decision that my wife would quit her job and be a stay-at-home mom.

      Initially she had trouble getting comfortable with this idea. While she loved the idea of being able to stay home with our daughter, she had always worked and her feeling was she wouldn’t be contributing if she weren’t bringing home a paycheck.

      I wasn’t having much luck helping until I said this:

      “We don’t want a bigger house or a fancy car and we have everything we really do want. So if you kept working, what could we possibly buy wiht the money that would have more value to us than you being able to stay home with Jessica?”

      She resigned the next day. 🙂

      • Jana says

        Just wanted to add…Some families need for both parents to work just to get by and I’m not judging that situation at all. Some moms want to work and that’s good too. I’m thankful I had options and got to choose. Not everyone does.

  7. Danny says

    I was anti-529 for a while given the restrictions and limited tax benefits, opting instead to just try to save as much money as we could in traditional accounts. That way, our ability to help our children would be a reflection of how well we saved combined with what life threw at us in the meantime.

    I’ve softened on that a bit, opting now to at least maximize our state’s income tax incentive of a $4,000 deduction. It only amounts to about $135 off of our taxes, but at least it’s something. We also know that a $4,000 annual contribution is also not anywhere close to what would be required to fund a college education for 4 children. So, we still aren’t using the 529 as a place to put all our college savings, but we feel confident that at least this amount will be used for higher education and we are in a position to put a minimum of $4,000 a year into a dedicated account. We won’t put a dime extra in, the rest of our savings goes into taxable brokerage accounts.

    • Matt Becker says

      I like the way you found a balance here Danny. The tax deferral within the 529 plan will add a little bit more to the tax savings as well, and you’re absolutely right that the amount you’re saving will almost certainly be able to be used on education.

      Thanks for sharing your plan!

  8. Aperture says

    Thanks so much for the post. You have brought greater clarity to this topic for me. I am father of two children 11 and 14 years old. My wife and I have saved enough for about 2 years of tuition and housing at a state school in a 529. We have been ambivalent about college savings and it remains a stressor, but for a reason you sort of mentioned: It is unclear that a four-year degree will offer a significant value to our children.
    While there continue to be abundant opportunities available to college graduates which are not available to others, the cost of that college degree should dissuade any one from the logic that ‘any degree is better than no degree’. In fact no degree and no debt almost certainly is superior to many degrees that come with a $100K+ price tag.
    I worry that a gift of partial college support may be inviting my kids to take on expenses that do not fit their values, before they have enough life experience to know what their values are.
    In our household, we will continue to discuss life paths and the costs/benefits of different choices. I hope that my kids will be ready to make a business case for a college degree that I can support (or for some other life pursuit). I would happily lose 10% of the growth in our 529 to put that money towards helping my children on paths that they are passionate about, if that path does not include college.
    Thanks for your article. I appreciate your thoughts, Ap.

    • Matt Becker says

      I understand your concern here and I think it’s well-founded. I honestly have no idea how college will evolve or how your children specifically would or would not benefit from a college education, but you’re absolutely right that in some cases the cost/benefit analysis doesn’t make sense.

      One thing to consider is that you don’t have to use the money you have to fund the full cost of the first two years of college. You could require your children to put some skin in the game as well by saying that you’ll cover 50% of the tuition each year and they’re responsible for the other 50%. Or some other combination that you like better. That way they’re invested from the start rather than getting two years in and all of sudden having 100% of the cost thrust on them.

  9. TheMoneyMine says

    I wasn’t very knowledgeable about the topic and I feel like I now had a good introduction, thanks.
    Personally, I agree with you on the order of priorities and being financially independent is higher on my list than contributions to my future kids’ potentially exorbitant education costs. As you rightly point out, it isn’t obvious that tuition costs will keep raising and there might be more alternatives and competition than there currently is to keep the costs down.

    Another element I personally do not like about 529 plans is the added wealth segregation that it generates. With money spread in 1 account for retirement, 1 for health, 1 for college, 1 for the mortgage… you could eventually become wealth rich and cash poor. Few of us have so much cash that they do not actually mind to have it locked for specific purposes.

    I’d much rather have the cash available to send them abroad, discover new activities and in general stimulate their minds than plan for ‘college’ specific education.

    Thanks for the overview, this was helpful making my mind on the topic 😉

    • Matt Becker says

      That’s a great point, and one of the big advantages of a regular investment account. Having the money available for ANY purpose is a huge benefit. There are many opportunities that present themselves and college is just one of them. That added flexibility can be handy.

  10. Randy says

    I think the biggest unanswered question for most of us with kids, is what option will affect potential financial aid? Does the amount in a 529 simply reduce aid, or would the parents’ net worth? I think it is one of the harder things to understand and prepare for. If I am at FIRE before my children go to college, how does that affect what they might be eligible for? Is there a strategy for that considering I wouldn’t have w2 income at that point? Do they look at net worth, real estate, or brokerage accounts? How about IRA and 401k’s? 529’s? etc. Thanks!

    • Andrew says

      A few people have told me there was a penalty for the 529 plan so I looked into it. I don’t think it’s true. Your child’s assets are accessed at a rate of 20% if the 529 plan is in your child’s name, so there may be a significant reduction. If it is in the parents name, it is only accessed at a rate of 5.64%. So if you have $10,000 in a 529 plan in the parents name, aid may be reduced by $564 which is pretty negligible imho. I do not believe assets in retirement accounts are counted when determining financial aid. I do think that being FIRE and having low income will be likely increase the chance of receiving aid. I’m hoping for that as well. And I’m also hoping Matt has a spreadsheet or calculator to figure that out =)

    • Matt Becker says

      Great question Randy! Here are three helpful resources that walk through these questions, and I have a quick summary below as well:

      ->Financial Aid and Your Savings
      ->Account Ownership: In Whose Name to Save?
      ->Maximizing Your Aid Eligibility

      And here’s a quick summary:

      ->By far the biggest factor in determining financial aid is income. So the fact that you project to have a low income will help.

      ->Parental assets typically only count at 5.64% (as Andrew mentioned), so the impact is small. Both 529 plans and Coverdell ESAs are considered parental assets, even when the child is the beneficiary. So saving in those accounts does not have a significant impact on financial aid.

      ->Certain parental assets are excluded from the calculation altogether. This includes retirement accounts and any equity in your home.

      ->However, any withdrawals you make from retirement accounts are considered income for the next year’s FAFSA application. This includes 100% of withdrawals from a Roth IRA, even the portion that isn’t taxable. However, starting in the 2017-2018 school year, these withdrawals actually won’t be counted as income until 2 years later, giving you a little more flexibility.

      ->Child assets are counted at 20%, which is one reason why UGMA and UTMA accounts are disadvantageous.

      ->Some private schools use something called the CSS Profile to determine aid instead of FAFSA. The calculations used vary by school so I can’t give you specific guidelines, but in general the broad principles are similar.

      Finally, here’s a calculator you can use to estimated your expected family contribution: EFC Calculator.

      It can all be very confusing, even for people who see this often. But essentially you want to save money in your name to minimize the impact. And the fact that your income will be lower when your children are in school will help as well.

      • Guppy says

        I noticed the mention of a Roth IRA in the child’s name. How does that affect the financial aid calculation

        • Matt Becker says

          A Roth IRA is not counted towards financial aid no matter whose name it is in.

          Distributions from a Roth IRA, however, WILL be counted as income for future financial aid applications. So you need to be careful there.

          • Guppy says

            Perfect. Thank you for the information. This whole article and the discussion/comments have been really educational.

    • jlcollinsnh says

      Great conversation on an important issue, guys!

      And now linked as an addendum in the post above.


  11. Andrew says

    Great comprehensive breakdown for us parents who want are wondering what the best way to save for their child’s education is. I opened a 529 plan and contribute a small amount each month…we’re in NY so there’s a small tax benefit, plus they have excellent low cost Vanguard funds. It may not be enough when the time comes, though I don’t think the rate of tuition price increases are unsustainable. You’re right that we don’t know how college will look like in 10-20 years. Another thing is that both my wife and I went to State Universities which are still relatively affordable.

  12. Paul says

    We have two sons, ages 6 and 9. Within a month of each birth, I opened a 529 account. I’ve invested $6000 a year in each account. The younger son’s account is now worth around $64,000 and older son’s is now worth around $83,000. Assuming a fairly conservative rate of return, the older son’s account is now fully funded assuming he goes to an in-state public university. The younger son’s account is also very close to being fully funded based on the same assumptions. By starting early, I’ve basically paid for their college educations before their 10th birthdays. We were lucky we had the income to do this. But, we also sacrificed in other areas. I’ll likely continue to contribute to these accounts over the next 10 years, but at reduced amounts, to hopefully give each more options. I certainly recognize the potential drawback of 529 accounts and I realize both my sons could decide on paths other than the traditional college education. But, in my view, the benefits of the 529 accounts were too good to pass up. Plus, the main reason I did this was so that each will hopefully avoid any student loan debt. I had what was then significant debt after finishing my education, and it was a heavy anchor.

    • Matt Becker says

      That’s great that you’ve been able to save so much! Your sons will have a lot of options when the time comes.

      I’m with you that these accounts are fantastic in the right circumstances. This certainly sounds like one of them.

      • Paul says


        Your article is great. Thorough, and very informative.
        A big concern about 529 accounts is how the government might change the rules in the middle of the game. About two years ago, the Obama administration proposed changing the law and taxing existing 529 accounts to pay for “free” community college for the poor. The administration’s stated rationale was that only “rich” people used 529 accounts. We are far from rich, and as stated in my original post, we sacrificed, and continue to sacrifice, to give our boys more options than we had. Thankfully, there was such a chorus of outrage about changing the 529 rules, the Obama administration withdrew the proposal. Still, it is concerning how the government could change the rules in the middle of the game and reverse years of effort and sacrifice.


        • Matt Becker says

          That’s a good point Paul and you’re absolutely right that any of this could change going forward. Obama did propose a rule to do just that, but it would have only applied to new contributions going forward, not old ones (see here).

          So while I don’t know anything for sure, my guess is that any changes would only apply to future contributions, not those that have already been made. Meaning that you can be fairly certain that the contributions you’re making today will function exactly as the rules currently stand.

  13. Julie and Will says

    Matt: Thanks for a thorough and informative post. We don’t have kids ourselves, but we’ll forward the link to siblings with kids to make sure they get the benefit of this overview.

    Most of the comments here respond to points Matt made about the financial aspects of saving for college education (529, UTMA, investment options, limits, etc.), but I also wanted to highlight another important point that Matt made, about giving your child some “skin in the game”: “There’s nothing like having to put money on the table to make a person take something seriously. Your child may end up getting much more out of college if he is required to invest in it himself.”

    As a long-time college professor, I (that’s Julie of “Julie and Will”) wholeheartedly agree. As a graduate student, I taught my own courses (100, 200, and even some 300-level courses) at one of the more expensive schools around. I had some wonderfully bright students who were clearly interested in making the most of their education. However, I also heard students say things like: “My dad told me that I could have whatever car I wanted if I got straight A’s this semester.” But somehow those external perks (and having their entire education paid for them) didn’t seem to really motivate those students internally, to learn and perform at their best ability for the sake of their education and their futures.

    On the other hand, I’m now teaching at a mostly first-generation commuter university where students need to squeeze in a course or two (or seven!) in between jobs and family. This investment they are making in their education makes all the difference in their attitude, their commitment, and their ultimate performance.

    Thanks, and best wishes!

    • Matt Becker says

      Thanks for sharing Julie! I love the idea of having your children participate and take ownership, even if you can afford to pay their entire way. When it’s done right, it can make the entire experience more positive and more enriching for everyone.

  14. Chadnudj says

    Great article, Matt.

    Just a quick reminder that 529 plans don’t have to only go to undergraduate education. They can be used on graduate education, community college classes, technical schools….hell, beauty schools qualify for 529 plans if your son/daughter chooses to go that path later in life. And since you can change the beneficiary, if your kid doesn’t end up going to college/using all the 529 plan, you can switch it over to a sibling, or a niece/nephew, or to your eventual grandchildren (thereby making it a somewhat targeted inheritance and saving your kids the need to save for their kids’ college education).

  15. Joe says

    Any thoughts on using a 529 plan as a pass-through for current college students? If your state offers a tax deduction for 529 contributions consider passing college expenses through it. Many states allow you to make a withdrawal immediately to pay for college expenses. Contribute money in July and withdraw it in August to pay tuition for the fall semester. In Maryland this tax deduction is worth about 8% on a $2500 contribution . Both parents can open accounts, so a total of $5000 can be deducted for each student (there is also a 10 year carry forward). That’s a savings of $400 a year when you file your taxes.

    • Matt Becker says

      Great point Joe. That’s certainly an effective strategy if your state allows you to do it. Some states do have a waiting period that require you to keep the money in the account for some period of time in order to take the deduction so you should check your state’s specific requirements first (I honestly don’t know the list off-hand). But if there’s no waiting period, then sure take the deduction!

  16. John says

    Too bad it looks like I have a lot of questions and this post is a few days old, but might as well try…
    I’m not sure about the reasons listed for avoiding a UTMA. I did open one for my son a few years ago and I guess I have not yet seen a problem.

    * There are no tax benefits.

    A UTMA is taxed at the child’s tax rate, which in our case is 0%, so that is a pretty good. This benefit is a selling point for these accounts isn’t it? Why do you say there is no tax benefit?

    * The money is irrevocably your child’s as soon as you contribute it.

    This sounds like another benefit. When the money is being put into the account, the people giving it wanted to give it. Doesn’t seem really fair to be able to take it back, especially if it is just because your child is starting to assert some independence. I can see it would be painful to see your adult child waste your gift on a drug habit for example, but the money part is not going to be the most painful part of that scenario.

    Anyway in our case I view the money as belonging to my son, so this is not a concern. And you can withdraw the money from the account to use for the child’s benefit before losing custodial status, correct? My son decided he wanted to take a trip to Europe with his high school drama club. We decided he would pay up to half the cost. And I withdrew some money from the UTMA account to pay for this. Vanguard did not stop me or ask any questions when I had the money transferred into my personal checking account not jointly owned with my son. It seems there is some flexibility; is there going to be a negative consequence from this? If not, then maybe there is some way a custodian of a troubled teen could withdraw the money from the UTMA account and use it for the benefit of the child? I don’t have any great examples, but maybe buying an annuity that pays out over 5-10 years.

    * They have a negative impact on financial aid.

    I agree this is a disadvantage. Is it possible to move the money from a UTMA account into a Roth IRA? In our case the UTMA account was created when our son did not have earned income. He is a junior now and still does not work. I do mention getting a job now and then when I see him waste a Saturday on video games. He is taking a full load of AP classes and very involved in extracurriculars, church, and charity, so I don’t push him too hard on it. But if it is possible to move the money in the UTMA account to a Roth, would it help to do so his senior year, or is that too late?

  17. Matt Becker says

    Good questions John. Here are my thoughts.

    **Tax benefits of a UTMA account**

    You’re correct that this can be beneficial to an extent, but there’s something called the Kiddie Tax that puts a limit on it. Essentially, if a child has more than $2,100 in unearned income (which general includes interest, dividends and capital gains), the excess is taxed at the parent’s marginal tax rate. You can read more about it here:

    **The money is irrevocably your child’s**

    You make a great point, which is that to a large extent whether this is a pro or a con is a matter of personal preference. If you genuinely want this money to be your child’s no matter what, then this may be a nice feature just to make sure that happens.

    You’re also correct that you have plenty of options for using the money while you are still custodian. Here’s a series of posts that go into some detail on this topic:

    ->UTMA Regret Part 1:

    -> Part 2:

    -> Part 3:

    **Negative impact on financial aid**

    Based on the articles linked above, I would imagine that doing something like this would be okay. But this is honestly outside my area of expertise so I can’t say anything for certain. I would suggest speaking to someone with expertise on this subject, like a trust attorney or possibly an accountant, to be absolutely sure.

    • Darren says


      I must admit I had the same reaction as John: No tax benefit? If I have an UTMA invested with a 3% dividend/interest/capital gain distribution, we are talking $70000 tax free. With an S&P 500 index fund, it is more like $100000.


      • Matt Becker says

        Would you mind providing a little more detail on how this would work? I am not a tax expert so there may be a route to making this happen and I would love to learn it. As far as I know though the Kiddie Tax would put a cap on the tax-free income.

        On a more general note, you are both right that I should have been more careful than to say “there are no tax benefits”. What I meant is that you do not get the same kind of tax breaks as you do with a 529 Plan or Coverdell ESA and I should have stated it exactly that way.

        • Darren says


          The computation I made is just that there is a $2100 threshold before the “kiddie tax” for investment income. Hence, a portfolio with a 3% yield could have 2100/.03 = 70000 before it exceeded the threshold. The S&P 500 is more like 2%, so the total portfolio could be more like $100000.


          • Matt Becker says

            Okay, gotcha. So you’re saying that you could have a $70,000-$100,000 portfolio and the distributions would be tax-free up to the Kiddie Tax amount. Yes, that’s correct. And that’s why I agree that I should have chosen my words more carefully instead of saying that these accounts have “no” tax benefits. Thank you for pointing out the nuance here.

            It’s worth mentioning though that this may not be a tax benefit for certain individuals. If you are in the 15% tax bracket or below, qualified dividends and long-term capital gains are already taxed at 0%. So shifting that income to the child wouldn’t result in any tax savings, unless those distributions would push you into the 25% tax bracket.

            It’s also worth noting that even for people in the highest tax bracket (23.8% for qualified dividends and long-term capital gains), the tax savings on $2,100 comes to just about $500 per year. Whether that savings is worth the loss of control is up to the individual.

          • Andrew says

            I tax gain harvest my 3 kids’ custodial accounts. That way the cost basis is ever-increasing, so there will be less gains to be taxed whenever we sell to pay for something big.

            The 20% hit on financial aid is a bummer though!

            So we do these 3 in moderation:
            1) 529
            2) Custodial
            3) Taxable brokerage (inherited with donor requesting it go to education)

  18. PFgal says

    Thanks for the great post! I was just asked yesterday for advice about 529s and saving for college. I mentioned some of the same things you did, but you brought up other great points. I’ve passed this along to the person who was asking me – it’s a complicated situation and it’s great to see the pros and cons laid out so clearly.

  19. MJ says

    To fund college for our two daughters, we considered 529 and the option to “purchase” credit hours in a plan that the state of Illinois had which eventually failed. Instead, we decided to max out our Roths every year and use them as our college saving tool and we are so glad we did! We ended up without having to touch them due to income from my husband’s extra part-time farming work and our other savings so we have that much more money available for our retirement. Having the money in the Roth was a great back up plan in case we had any emergencies pop up-it gave us piece of mind. I highly recommend it.

  20. John says

    I’m interested in the mechanics of a child’s Roth IRA. Is there a benefit beyond the teaching aspect and getting a head start? I find both of these reasons valid and are the reason I’m interested, but given the inclusion in a blog on funding college education, I’m wondering if there are more immediate financial benefits; given there is the fact that the funds are not counted against financial aid.

    Prior to teenage years, assuming a slightly above average child, they might have some baby sitting or yard work type of income. But how important and detailed do the records need to be on the earned income aspect? It would really be lame to lose a huge portion to taxes, if the government chooses to declare the contributions invalid. Filing a tax return for those years, would probably be a good idea, right? It would be considered proof, if the government accepted the return? Maybe it’s not requred that a tax return be filed, is there other proof equally as good? Hopefully there is something to be said about this that falls into generic financial knowledge and not consult your tax attorney variety.

    Now move to late adolescence and young adulthood, say 17-22. The latter of that range the “child” will already be in college. Won’t their whole income be counted in financial aid decisions or can they exclude income put into a Roth IRA? The head start aspect of contributing to their Roth would still be there, but for many parents, this will be a time where they are actively significantly contributing directly to the college cost.

    In the range of 15-17, the child could earn significant income. I’d think it would not be a good lesson to encourage the child to spend all their money to avoid asset accumulation. So let’s say, you offer to match savings at 1:1 or 2:1, whichever direction (total less than the limit). And let’s say you are both contributing to their Roth. Do you suggest money be heavily allocated to bonds, or cash equivalents, since the money may be used within a few years? That seems prudent, but the educational benefit is lost of investing in stocks (index funds) when you are young and getting used to the volatility. And what about breaking the seal where the IRA starts to be seen as regular savings to be tapped as needed in the moment. Do you encourage them to save in a savings account, while your contributions go to the IRA and are invested long term?

    Thanks if you have time to respond to some of my infinite questions.

    • Matt Becker says

      All good questions John. To start, I included the Roth here for two main reasons:

      1. It can be an effective college savings vehicle, particularly when owned in the parent’s name. That’s because the principal can be withdawn at any time without penalty (though even that counts as income for FAFSA in future years), the earnings can be withdrawn without penalty for higher education (though they will be taxed), and in the case you don’t need the money for college you can simply use it for retirement.

      2. This article was also meant to propose ways you can invest in your child beyond specificaly saving/paying for a college education. The idea of helping your child open his or her own Roth IRA was primarily mentioned in that vein, though it certainly could be used for college as well.

      In terms of having proof of income, filing a tax return for your child would certainly be the most bulletproof way to do it. If you don’t do that though then at least keep good records of the work done, when it was done, and how much was earned. You can read two good articles on this topic here and here.

      As for your child’s income while in school, yes I believe it all counts against financial aid whether or not some of it is contributed to a Roth IRA. But having that money in a Roth IRA as opposed to a regular savings account will decrease its impact because it won’t ALSO be counted as an asset.

      In terms of how to invest it, I would recommend using the same principles as you would in any other situation. If you anticipate the money being used in the near future, it should be invested conservatively. If it is for a longer-term goal, it can be invested more aggressively. It really depends on the specific circumstances.

      The last point you make is a REALLY good one. I absolutely think there’s a risk in presenting your Roth IRA as a short-term savings account when its best use is obviously long-term. So when it comes to opening a Roth IRA in your child’s name, I see it as a much more effective tool for helping them jumpstart their long-term savings than for use as college funding.

  21. The Jolly Ledger says

    We will probably contribute some to our child’s education through the Roth IRA option after conversions. However, as an aspiring early retiree, I hope to contribute more to her education through travel and time once she is eleven. I see the benefits of this as setting her up for a lifetime of success and self-efficacy. We will also encourage her to apply for scholarships that compliment her talents!

  22. Patrick says

    Random question: I have most of my retirement money all in the VIGAX fund. It’s like 2500 shares. I was just curious what your opinion was of this fund. J Money recommended I reach out you and get your feedback.

    • jlcollinsnh says

      Hi Patrick….

      VIGAX is Vanguard’s Growth Index Fund and it carries a .09 ER.

      Being growth oriented, it is more aggressive than VTSAX (.05 ER) which covers the entire market.

      Looking at the last 5 and 10 year periods, it has had excellent performance and has also outperformed VTSAX:{“range”:”10y”,”allowChartStacking”:true}

      So it has done very well for you and may well continue.

      However, Growth investing, like all sector investing, goes in and out of fashion. Since I can’t be sure it will remain in fashion, I prefer VTSAX.

  23. Dollar Flipper says

    Another benefit of a 529 is that it gives the warm and fuzzies to any grandparents who want to give helpful gifts to a child. At least the 529 is in the child’s name (even if it can be moved afterwards). My parents and i in-laws love to give us money at Christmas for the girls instead of only more toys.

    • Matt Becker says

      I 100% agree with both of you. My kids have a few great grandparents especially who have specifically asked to contribute to their college savings. Having 529 accounts open for this purpose has definitely been a good thing.

  24. Ross says

    Hi. Love the blog. Quick question: how do you put your money into your child’s Roth IRA? Can’t their Roth IRA only contain up to their own earned income, and not a penny more?


    • jlcollinsnh says

      Hi Ross…

      The deal is, a Roth IRA can only be funded if the child has earned income and then only up to the $5500 max. But the money used to fund the IRA doesn’t have to be the child’s.

      So, if my daughter earns $4700 during the year she can spend, save or invest it and I can fund her Roth using my money.

      • Moezer says

        What type of paper trail has been created in the event the IRS asks questions? Was a tax return filed in the daughter’s name?

  25. Lucas @ Tortoise Banker says

    A prominent poster over at Bogleheads shared the recommendation to paying from cash flow, and I intend to primarily use this method. I am saving a small amount every month into 529, and get sporatic gifts from parents/grandparents, but I expect less than half of college bill to be saved for 17 years from now (have a 1 year old). Our net worth is now 565k though, so hopefully before then we’ll be FI/RE. (target date is 7/4/2022).

    • jlcollinsnh says

      Hey Lucas…

      Nice to see you here!

      Yep, that’s what we did.

      But, of course, we spent years positioning ourselves to be able to do so. 😉

  26. Travel Travel & Retire! says

    I love this post (well your entire blog but this is the area I struggle with the most). The piece of the puzzle that find hardest to plan for is precisely this – as I blog about it being something that I am pretty sure will be changing by the year. We were originally thinking 100k by the time they each go to college (for each( in 10+ years, but now I think we will just put $25k (super fund early for each – that is as much ‘super funding” we can do right now) and probably just add about 1500 dollars per year each and leave it at that. We put so much emphasis on travel and getting experiences RIGHT NOW, which is really most important to us, but still I want to be sure that if they choose to go to college they are not saddled with gazillion dollars in debt. then again, if that was the case I would then encourage them to consider skipping the experience…mmmm, what to do, what to do. I am loving your roth matching idea! now that they are young we give them allowances and match every quarter if they chose to not spend the money, so hopefully that will start creating some habits…

    Is it terrible that I am already brainwashing my young child about finding ways to minimize expenses in college lol? I keep telling him “woudn’t it be amazing to move to Germany? (and study for free! haha).

    • jlcollinsnh says

      Thanks TT&R…

      of course the credit for this post goes to my pal Matt.

      Never too soon to start brainwashing the children. 😉

  27. Tor says

    Hello Jim and Matt,

    I’ve read the entire stock series and just wanted to tell you thanks for this blog. It has made me feel so much more comfortable about my financial situation and made me feel like I have a reason for doing what I am going. While as before I just felt like I was going against the “common” wisdom of buying a house and getting a 9-5. I just bought my third copy of your book because I keep finding more people to pass it out to! My wife and I have been reading it aloud together so we can come up with a financial plan. So thanks!

    But my main comment was for Matt. Thanks for all the thorough responses. I am looking to start a saving source account for my 16 month old nephew and I have been thinking of buying federal EE bonds. In 20 years from the date of purchase they are guaranteed to double if they haven’t already (which they won’t with the fixed rate of .1% they are getting right now). In which case it’s a 3.5% annual return backed by the full faith of the us governement. If you open a 529 plan and plan to be aggressive in stocks in the beginning and more conservative as they near college age averaging 4% then it might be worth the .5% lost return for a guarantee 3.5% return.

    As I said my nephew is 1 so he wouldn’t be able to use it until he was 21. But if it is used for education then the appreciation is tax free and if he wants to use it for anything else (a fast car, starting a business…) its just treated as regular income.

    I haven’t found a good blog post on this so I figured I’d ask if you see any draw backs to it? Or if you knew of any good posts? I read the treasury direct. Gov website but it’s nice to see how other people have thought through and done the process. Thanks,

    • Matt Becker says

      Great question Tor! Series EE bonds can certainly be useful in the right situations, and you can read more about the ins and outs here:

      For your specific situation, however, it’s important to note that the income can only be used tax-free IF the expenses are for yourself, your spouse, or a dependent. So unless your nephew is a dependent and you claim an exemption for him on your tax return, you would be taxed on the income.

      That doesn’t necessarily make it a bad move. You just need to factor that in when considering the trade-off in returns.

  28. Aaron Gerard says

    I have a college savings questions that hopefully someone can help me with. My niece is 5 years old and through savings, birthday gifts, etc has finally accumulated 3000$ total. I would like to help her set up a brokerage account that will eventually be used to fund her college education. My question is whose name should it be set up under? Can a 5 year have that type of account? or should it be set up under my sister’s name? Thanks in advance for any advice you have to offer.

    • jlcollinsnh says

      Hi Aaron…

      As I recall, and we did this with our daughter, your niece can have her own account but it will require a guardian on it until she is 18 (or maybe 21). That that point it comes fully under her control and she can spend it on college. Or on buying her new hoodlum boyfriend Spike more blow. That’s the risk.

      You can also set it up in your sister’s name and you and she just mentally earmark it for your niece’s college education. Of course, then you have to hope your sister doesn’t fall in with Spike.

      So, in 13 years, who will be less likely to fall for Spike’s bad-boy charms? 😉

      • Aaron Gerard says

        Haha it seems like Spike is the problem either way. Thank you for the advice and also for sharing so much great information. I really enjoy the site. I gave your book to my youngest brother as a gift for Christmas. He is loving it. Thanks again.

      • Marta says

        Would having a guardian on this type of brokerage account require opening a custodian account? I’m doing this for my sisters who are 13 and 15 years old respectively, and already have UTMA accounts set up with Vanguard.

  29. Susan Daniel says

    Question from a college grad. I have student loans at 2.125% interest. Does it make sense for me to put all my available cash towards paying it off at the expensive of contributing anything to my investments (it’s over $60,000 in total) or should I pay it at its installment rate and put my savings money into VTSAX since that will make me several percent more?

  30. Matt Mecham says

    I enjoyed reading about the different ways you shared about saving for college, Matt. I also read each of the comments. I was looking for one thing in particular, and only one comment early on briefly mentioned it: military service. I served in the United States Marine Corps, and the G.I. Bill paid for a huge portion of my Bach. Degree.

    Military service is honorable and helps build character. It toughens up kids and helps them learn how to work individually and with a team. Military service helps open a person’s eyes to the world around them, and can take them to interesting lands. It can provide invaluable training for future employment. And the list goes on. On top of all of these benefits, the military will pay for a kid’s college education! What a great deal!

    Is military service dangerous? It can be, but I would say it is no more dangerous than sticking our kids in a car and hurtling down the interstate at 75 mph, surrounded by other two-ton hunks of metal and plastic doing the same thing. ????

    My son joined the Utah National Guard, and I could not be more proud (well, I guess it would have been even better if he’d joined the Jarheads, like his old man, haha). He will get all of the benefits I listed above, with paid-for college tuition to boot.

    I just want to make sure that the G.I. Bill is fairly represented as an option to help pay for college. Thanks for a great article!

  31. LP says

    Hey Matt and Jim,
    I’ve been reading a lot about college savings accounts lately and came across this post. We opened 529 accounts for both of our boys when they were born – it seemed like the right thing to do since we really want them to go to college, however, the more I read on this subject the more I feel that we don’t actually need these 529 accounts. Our money would probably do better invested in our Vanguard account (we’re not worried about spending it on other things). We stopped contributing to the college accounts and now put any excess money into our investment account. My question though is what to do with the money in the 529 accounts. It’s not a lot – about 8k combined (our boys are really little) and we are not getting any tax benefits (the accounts are in Iowa and we live in NC). Should we just leave the accounts as they are and continue to add any excess into our Vanguard account, or take the (fairly small IMO) hit and move the money out of the 529s and into Vanguard? If I understand correctly, we would be charged a 10% penalty and the amount would be taxable as income but I don’t think that will put us into a different bracket. Thanks for any feedback you may be able to provide! We’re fairly new on our path to FI and have lots to learn but great posts like this, along with the discussions in the comments, are making it much easier!

    • Matt Becker says

      I would probably leave the money in the 529 plan. The odds are high that you’ll be able to use it for college expenses down the line, and by keeping it there you get the dual benefit of years tax-deferred investment growth and tax-free withdrawals.

  32. Paul says

    Love the blog. I’m curious, why are you using a 4% return rate for this article instead of the 8-12% average you use in most of the others?

    • Matt Becker says

      Good question Paul. I used a lower rate of return because of the shorter timeline. Even if you’re retiring tomorrow, you’re still looking at decades of investing with an indefinite endpoint. Whereas with college, you’re looking at a maximum timeline of about 20 years with a definite endpoint, meaning those later years will feature more conservative investments that will decrease your average return. The last few years in particular may be mostly or completely in cash.

      To say it more succinctly, saving for retirement lends itself to a more aggressive investment strategy, and therefore higher returns, than saving for college.

  33. JRod says

    This post has been very thought provoking for me and along with other recent events has me rethinking how I should be saving for my kids education.

    We have been contributing to our kids 529 plans since they were born. We have contributed $200/month plus their Alaska Permanent Fund Dividend (PFD) checks which have ranged from $1,000 to $2,000/yr. The kids now aged 10 and 7 have ~$40k and $26k in their accounts respectively. Recently the Indian Tribe the kids are members of has opened a mega-casino in Washington that appears to be wildly successful. With anticipated profits from the casino the tribe has stated that ensuring free college education for tribal members is a top priority.

    In light of the recent tribal news and after reading your article I’m thinking of changing up how we’ve been saving for their education. My initial thought is to stop contributing the $200/mo to their the 529 accounts and instead invest that in our taxable vanguard account. The kids AK PFDs would no longer be invested in their 529 accounts but instead into a taxable account in their names.

    I love the increased flexibility of not having all their money in a 529.

    Any thoughts would be appreciated! Thanks.

    • Matt Becker says

      There are a lot of variables here JRod, many of which involve programs that I’m not familiar with, so I unfortunately can’t provide much guidance.

      The one thing that caught my eye was this: “The kids AK PFDs would no longer be invested in their 529 accounts but instead into a taxable account in their names.” I’m not exactly sure what you mean here, but if you’re talking about taking money out of a 529 savings account before your kids are in school, you might want to re-think that. As long as there’s a good chance that you’ll be able to use the money for college expenses, keeping it in the 529 plan will allow it to continue to grow tax-deferred and to be used tax-free. Withdrawing it would likely subject you to taxes and a 10% penalty.

      Though again, I’m not familiar with most of the programs you’re talking about here, so there may be something I’m missing.

  34. Caleb says

    Might I suggest another option that provides tax advantages and flexible use all while teaching your child how to invest and some basic skills?

    My wife and I are 20 years old, currently we own 1 house but plan to build a small portfolio of rentals by the time we reach 30 and retire (less than 10) which will represent a small percentage of our net worth (just a form of diversification and if all else fails we have somewhere to live).

    So what we plan to do is at the birth of any children we may have is to buy a rental property “for” them. Using 20% down in the markets we invest in this would be something like $30k initial cash outlay total. Then get a 15 year mortgage to cover the rest with the rent paying for the mortgage and expenses (of course we will cover any shortfall but the deal will be set up such that that shouldn’t be neccessary).

    When our child(ren) are growing up we won’t mention anything about the house being theirs they will just be taught how to manage a rental etc. when they graduate high school their graduation gift will be a paid off house worth about $140-170k in today’s dollars so about $200k with conservative appreciation over 18 years.

    They can use this as they please, sell it to go to college, live in it rent it anything they want. And while we own it the property tax and mortgage interest are tax deductible for us so it’s a win win!

    This may not be an option for everyone but I strongly recommend it because it’s a great tool to teach your children “higher level” money management/investing then just put X in and earn X per year.

    Just to clarify the vast majority of our net worth is in low cost index funds managed by wealthfront and in the TSP ( military equivalent of 401k)

    • jlcollinsnh says

      Very cool idea, Caleb…

      …but be aware of the federal gift tax:

      Right now, the annual exclusion is $14,000, so you and your wife can give a total of 28k to each child each year.

      Possibly that is enough for the downpayment on the houses you are considering. So you could buy it in the kid’s name, manage it for them/with them when they are old enough and then surprise them with the fact that it is actually theirs when the time comes.

      You’ll want to run this past a good tax pro first.

      BTW, you and your wife are only 20? Congrats on having your act together at a far earlier age than most (including me!)

      • Keith Schroeder says

        Caleb, I love the way you think, and, Jim, you make a salient point: gift taxes.

        I have a suggestion. Rather than just dump the whole property on your child at a certain age forcing a gift tax return to be filed, consider putting each property in a separate LLC you want to transfer. You can gift a fractional share of the property to your child each year until full ownership is transferred without gift tax issues.

        The LLC doesn’t have to be formed until you are ready to start transferring ownership. You and your wife, Caleb, can gift $14,000 each to your child. The investment property needs to be in both your names. This allows $28,000 of ownership transfer per calendar year. You can supercharge the early years by transferring $14,000 each late in the year, say December, and another $14,000 each early in the year, say January. This allows a $56,000 transfer of ownership in a very short time period without gift tax issues.

        One final note: Generally you can file the income properties on your personal return if a husband and wife are the only owners. Once the gifting process begins a partnership tax return will be required until the transfer process is complete. Then it will all go on the child’s tax return.

        Hope this help, Caleb. You have the right thought process.

  35. Keith Schroeder says

    I have to put my foot down without writing another blog post in the comments section. I will be brief.

    First, I love using the Roth IRA as a college funding vehicle as stated in the post.

    Second, college funding can HURT your tax benefits! In other words, your college savings funds could cost you money on your tax return over using just ordinary savings or the Roth IRA. I’ve covered some of this a while ago on my blog. You can use the search feature on my blog if you want. I have a post in my queue to dig deeper into this issue, but it is months away or longer from publication.

    There is a lot of good information in this post and the comments add as well. All I can add to the heap of knowledge is college funding is not all it’s cracked up to be when you consider the “real” tax consequences.

    Finally, there are certain instances when you save for the kiddos college education and the kiddos ends up smart as a whip and gets a free ride through scholarships. Now you have a tax problem in many cases. There are ways to mitigate these issues, but are not always available.

    College savings plans sometimes are built on the foundation you have a stupid kid. It sounds funny, but is dead serious. If the kid is too stupid he will not go to college; if she is smart as a whip she doesn’t need your money to go to college. College funding is best when your youngster is in the middle zone.

    Great article, Jim. IMHO people should bookmark this for later review. It takes more than one read to digest all the material.

    • Matt Becker says

      Thanks for the input Ken! Could you link to your article explaining how college savings funds could cost you tax money? I tried to find it myself but was unsuccessful. Or are you simply saying that’s the case IF you end up withdrawing the money for something other than college?

      • Keith Schroeder says

        Hello Matt. The closest I get to college savings accounts affecting student aid is:

        Money in college savings accounts can have a negative affect on certain student aid programs. It would be too long to put in a comment. What I need to do is write a full blown post on how this works with examples from my office. Stay tunes.

        Something else to consider. If you have a 529 plan the tax-free earnings could limit your tax credits! The American Opportunity Credit is worth up to $2,500 per year for four years. Losing all or some of this $10,000 credit would add to your education in a painful way.

        You need to review your entire situation before committing to traditional college funding plans. The worst part is you must have a clear view of the future which is why I never used traditional education funding pathways for my kiddos. My crystal ball is cracked and cloudy.

        • Matt Becker says

          Gotcha. Thanks for the reply Keith! If you do end up doing a deep dive on this I’d love to read it. This kind of information is incredibly valuable both to me and the people I work with. And I’m not a tax expert so there’s always plenty for me to learn.

          On the subject of aid, I’ve always felt like saving, if you have the money to save, is preferable to hoping for aid. My thinking is that having money is better than needing it, only a small percentage of parental assets even count against aid, and a large percentage of aid really comes in the form of loans. There are certainly all different kinds of nuances in there, but that’s been my general stance.

          As for the tax credits, that’s a great addition to this post that people should be keeping in mind. But again, there are a few aspects to it that would prevent me from discouraging people from saving at all. 1) You can use both college savings funds and the tax credits, just not for the same expenses. 2) The tax credits are fairly limited in the amount of tuition they pay for. 3) The tax credits are income-dependent, so high-earners may not be eligible for them.

          With that said, understanding all the ins and outs and striking the right balance is key. But of course, as you say, knowing ahead of time how all of this will play out 10-20 years from now is impossible! Which is what makes this kind of planning so tricky.

  36. Zack says

    First, I apologize that this comment isn’t entirely on topic, but I did want to get your advice and I couldn’t easily find your email. I love your blog and have read your book (sorry I checked it out from the library so I don’t own it). So the reason I am contacting you is that I am creating an online FI course to get beginners up to speed with the key action steps to give them a quick start to their FI journey. I teach Personal Finance to high-school students and squeeze FI concepts around the traditional curriculum as much as possible. I was hoping to get your input on the most important things to go in the course are. I already put a link to your stock series for the investment portion in my rough draft/outline.

    • jlcollinsnh says

      This is an odd post to have chosen for your question, Zack. 🙂

      Plus, it is a difficult question at that.

      I suppose I would focus on these points:

      –Your savings rate is critical.
      –It is not about deprivation, it is about buying your freedom.
      –Stocks are a powerful tool for building wealth.
      –But they are volatile and it only works if you hold for the long term.
      –Broad-based, low cost index funds are the way to own them.
      –Market plunges are a perfectly normal part of the process, not the catastrophe the financial media would have you believe.
      –The market always recovers and goes on to new heights.
      –You cannot time the market or predict these drops.

      Hope this helps!

      • Zack says

        Sorry again for the off-topic comment. I correctly guessed that helping people understand FI concepts is important enough that you would give us your valuable time to answer this question. My first thought was putting it at but comments were disabled (probably to avoid off-topic questions). My next thought was put it in the post about education which is what I did. Hindsight, I should’ve thought more of what your likely answers would be and put in a post that would better align with that content. I’m thinking would’ve been much closer.

        Either way, I’m glad I asked because your response is indeed helping me create a better course. My ego didn’t want me to ask when I saw the comments were disabled at askjlcollinsnh page. It told me you have read his book and plenty of his blog, you know what he is going to say, but luckily I have been led astray by my ego enough times to know to ask anyway. There are some parts I felt I already covered in great detail, but there were also several very important points that I didn’t cover thoroughly enough or at all. So thank you for those improvements!

        PS my ego wants you to know that I did talk about the importance of savings rate, not being about deprivation, stocks are powerful wealth building tools, broad-based index funds (especially from Vanguard) are the best. So some of your writings did stick with me!

        • jlcollinsnh says

          No worries, Zack….

          …I’m happy to help.

          I shut off “Ask…” because it became too overwhelming with requests for detailed responses to total life situations.

          Good luck with the course!

  37. Patrick says

    I’m a little late to the party here.

    My state offered a refund for part of the value of the funds you contributed to their 529. While I was single and below the income limit (I have since married and we exceed the income limit for this refund), I contributed the minimum amount to get the maximum refund, assuming I would have kids someday, since I do not plan to go back to school myself.

    So now I have a couple thousand in a 529 under my name. I have not yet decided if and how I want to save for future kids’ college (beyond what’s there already), but if I opt to use 529’s for that, should I contribute to mine or should I open one in their names?

    We do not have children yet, so everything is completely uncertain. I like the flexibility of having it all under my name so if there are multiple kids and one doesn’t go to college, they can’t be an a** and not name his/her brother/sister as the beneficiary. But I am also worried that only one of them could be a beneficiary at a time if they’re in school together.


    • Matt Becker says

      Hi Patrick. With 529 plans, there is both the account owner and the account beneficiary. As long as you are the owner, you are allowed to change the beneficiary to any eligible family member of the current beneficiary. So if, for example, you have kids and keep it in your name, you could eventually use some or all of it for any of your kids simply by changing the beneficiary, or by opening a new 529 account with them as the beneficiary and transferring the money. Or if you put some/all of this money in one child’s name, you could change it to be for another child down the line.

      The bottom line is that while your question is a good one, it’s not something you really have to worry about. As long as the beneficiary is someone in your family, you will have the flexibility to use it for anyone in your family.

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