Smart Ways to Save for College Even If Your Kids Might Not Attend

April 23, 2023

Should you bother saving for college if you are unsure your kids will even attend college? In this highlight, Brian and Bo discuss what variables you should consider when saving for college expenses.


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We’re going to kick it off with Dale’s question. Speaking of higher education, he says, “Not knowing whether both my kids will attend college or if one or both will get scholarships, is it worth holding some of their college funds in my brokerage account as opposed to all in their 529 plans? How do you go about thinking through saving for this when there are so many variables?”

Yeah, it’s so funny. We have clients who ask this question all the time: “Hey, I’m trying to think about saving for college.” And it’s always so funny. I feel like the conversation starts this way: “Oh, you know what? My child, two years old, super advanced. They are going to get scholarships. Holy cow, I don’t know if I want to save in the 529.” And then as time goes on and that small child turns into a younger child, turns into a young adolescent, “I don’t know if this kid’s going to college. Maybe I don’t need to save for college.” It’s funny how the conversation changes.

One of the things that I always counsel clients to do is when you think about saving for college, you ought to come up with what do I think it’s realistically going to cost. I’m going to say, “Okay, I think they’re going to go to an in-state public university. It’s going to be this much per year, and I need to have that for four years.” But I don’t want to overfund or maybe I have two kids, and I don’t know what that’s going to look like. Rather than trying to save 100% of that amount in a 529, I think it’s okay if you shoot for some lower percentage. Maybe your goal is to save 75% of what you estimate the total cost of college to be so that all the while, you’re building up money in an outside brokerage account as well so that you don’t overfund.

Now, with that being said, Brian, there are some recent legislative changes that have affected, “Okay, if I am someone who puts money into a 529, it is overfunded. Maybe it’s not the worst case in the world, bro.” I think it’d be interesting to talk about what are the legislative changes and then worst-case scenario, even if you do overfund a 529, what does that mean? What are the practical implications of that?

So, there are three quick notes I wrote down for everybody who’s saving for 529s and saving for education. First, when you’re trying to figure out account structure, first look at your family structure. Do you have the oldest child, the middle child, or the youngest child? Because that will impact. Because you can comfortably overfund the first one and pass it right down to the other siblings. If they don’t have enough, you want to kind of sprinkle some on top to make sure they have enough. That’s a great opportunity.

The other thing is that there are other opportunities of money even if your child doesn’t go to college. Trade schools, beautician school, becoming a plumber, electrician, a lot of associate degrees. All that stuff is going to qualify now. Even K through 12 private schools are paid for. Of course, educational expenses, you can even – there’s lots of opportunities to use 529s besides just a four-year degree. And then what Beau is alluding to was the Roth. You can actually use your 529 to essentially prime the pump on funding Roth IRAs once these kids get out of school or get out and do life or do whatever they’re going to do. You can use this money now as long as the account

You can use this money now as long as the account has been around for 15 years, and any of the funding that’s past the five-year mark has to have earned income. There are definitely some restrictions and a gauntlet of things you have to answer to make this money eligible for the Roth transfer, but it will definitely protect you from overfunding. The last thing Bo shared was what it means if you overfund or if your child gets an academic or athletic scholarship. Here’s the reality: if you have scholarships to offset the cost of education, you can pull that money out of the 529 and only pay income taxes on the gains. You can waive or bypass the penalty because the government understands that scholarships are something to be celebrated. But if you just pull this money straight up and can’t account for it with anything related to education, you will pay income taxes on the gain plus a penalty on the earnings. It’s not the worst thing in the world if you overfund, and you have some money left over that you have to pull out, and you have no other beneficiaries to roll it down to.

Dale asked if he did this through his brokerage or his 529. I think we covered all the education components of it. Now, Dale, I’d put it back on you and say, are there other goals that you have for your children that you’ve already accomplished education, and you’re going beyond that? Now we can talk about whether it makes sense to use custodial accounts because they offer some benefits, especially if you’re in a high-income situation. You can build out assets outside of your family, and your money can start working in the lower tax brackets. This could pay for weddings, the first home, potentially matching funds for a first home purchase. There are reasons to think about that, but do not skip steps and bypass education. More than likely, the kids will want funding secured for the cost of education if you get to step eight of the Financial Order of Operations.



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