Savings for baby (private school and college)- is a 529 worth it?

Submitted by Taileile t3_yichk9 in personalfinance

We're sitting on some savings for our 4 month old who is also gifted money from family for events like Baptism/holidays and I'm getting worried about inflation influencing the value. I know we need to move it into investments somehow. I'm looking at opening a 529 with Fidelity.

We plan on having her in private school from age 3 to graduation, and also want college to be an option for her. Some questions:

  • I know 529 funds can be used for private education, but is this even worth it for the short term (ie elementary and middle)? I could see it being helpful for high school given time to grow, but is it typically recommended to just save it for college?

  • If it's better to only use the 529 for college, is there a different savings avenue for private k-12 or is it OK to leave it in the bank account? Note: we live in WV where the Hope Scholarship will potentially help pay for private education once she hits that age, but it's tied up in state legislature so I don't want to count on it.

  • Would the funds be better used elsewhere? There is always a chance she won't go to college- but we do plan on having more kids. The money can be transferred to other kids correct?

  • To clarify: there is no way to establish a custodial IRA for her retirement savings since she cannot earn an income at this age correct? If possible we'd like to save for her retirement too.

  • What did you do with your own childrens' savings?

Thanks!!

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93195 t1_iuhwfl0 wrote

529 for many reasons.

West Virginia is one of the best states to live in for 529 contributions, because contributions to a WV 529 are fully deductible from state income without limit (up to your income anyway). Nearly all other states have limits, if they even give a deduction at all.

For her K12 private school tuition, up to $10K/yr can be used from a 529. You’ll want to be sending her whole annual private school tuition (up to $10K) through the 529 for the state tax break, even if you immediately withdraw it with no gains.

If your child does get a scholarship, 529 earnings up to the scholarship amount can be removed penalty free.

My own children - 529.

It’s clearly the answer in your case.

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BourgeoisieInNYC t1_iuhyhq0 wrote

Wow I did not know about being able to remove 529 earnings up to the scholarship amount. Thank you!!

This is for all states not just WV right? We said we’d open a 529 and keep putting it off and our daughter is now 10+ months 🤦🏻‍♀️

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BouncyEgg t1_iuhyyth wrote

> This is for all states not just WV right?

Correct.

Also note that while it is penalty-free, it is not tax-free.

You should expect to pay taxation at ordinary income rates on the gains.

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93195 t1_iuhz3s5 wrote

Correct, that’s all states.

In general, 529 penalties for unqualified withdraws are nothing to be THAT scared of. You can change beneficiaries. There are exceptions for scholarships. 529s can be used for trade school, qualified job training expenses and other things, not just college. You can just let it ride for possible future grandkids.

In the very worst case where you do need to make an unqualified withdraw, taxes and penalties are on earnings only. 100% of the amount you put in is always yours, tax and penalty free regardless.

As far as worse case goes, really not that bad, especially given the tax benefits of the extremely likely case.

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BourgeoisieInNYC t1_iui20qo wrote

Someone told us that if our child has a big 529 then she won’t likely qualify for any financial aid (when applying for FAFSA) and said it’s better to keep it in a savings account but NOT under the kid’s name..?

I feel like we need to talk to a financial advisor for these things which won’t be until 17+ years later

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93195 t1_iui55os wrote

Your assets count in the FAFSA formulas too. Unless you are pretty low income, most “aid” is just going to be loans anyway. If you’re middle class or better, you’re not getting need based grants or free money, at least not under the system as it exists now. So don’t worry about it.

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BourgeoisieInNYC t1_iui5ixt wrote

Thank you!! I grew up in a super low income household and that mindset is still hard to break out of even if I’m much better off now than my parents were. Thanks again for the reassurance. Def setting up a 529 this week!

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Ruminant t1_iuipxfz wrote

To elaborate on the other reply (which is correct):

FAFSA computes an "expected family contribution" amount which it uses to judge eligibility for aid (particularly grant-based aid). Parents are expected to contribute 12% of their "discretionary net worth" to that amount. Dependent students are expected to contribute 20% of their total net worth to the family's expected contribution. This is where the advice to keep college savings out of the student's names comes from. (I pulled those percentages from here: https://fsapartners.ed.gov/sites/default/files/attachments/2020-08/2122EFCFormulaGuide.pdf)

However, most 529 accounts are owned by the parents. The child is just the "beneficiary". So FAFSA treats 529 accounts just like bank accounts, general investment accounts, and any other non-retirement account.

More significantly: your income has a bigger effect on your expected financial contribution than your assets. In order to build a large enough college fund that it can disqualify your child from receiving grant-based financial aid, you realistically need an income which alone is high enough to disqualify your child from receiving that aid.

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