Sorry kids, no 529 for you. But I may have something better…

“ARE YOU CRAZY?” I hear you shout.
Yes…No…Maybe…Who knows. For those of you not American, a 529 account is a way to invest pre tax money in a kids education fund. I want my kids to grow up, take responsibility for their own decisions and manage their own debt. If they want to study at a top school and eat avocado toast everyday whilst daddy is bringing pack lunch to the office they can forget it!
Instead, I want them to be be responsible with the second most expensive decision they’ll make during their lifetime. They need to think about what career they want, where they want to study and which route to choose. Will they work during college, will they stay in state for cheaper tuition, will they not go altogether if they want a career where it’s not necessary. Do they need a $100k+ college degree to be an electrician or teacher etc. They need to own this decision and pay for it themselves.
In return, i’ll fund the first FIVE years of their 401k/retirement accounts. This will be slightly under $100k each, but I will show my children the power of compounding and what this gift will actually be giving them over the long term. It will also give them a few years to pay their debt off without falling behind on retirement accounts. If a 21 year old maxes out his/her retirement account for just five years, and doesn’t invest anymore, selects stocks as the main investment vehicle, hopefully doesn’t touch the money…it should return approx 8% and they will have $2.5 million at retirement of 65 years old.
This money will be safe and secure. If they keep adding this, it will become even more powerful. This accounts for inflation.I wrote another article about how I’m investing $100 a month per kid in the Total Stock Market account and tracking it every month. I plan on informing my kids about these accounts once they are older and can understand more about compounding and how money works. You can find that article here. By following this practice my kids should have close to $60,000 once they go to school. This will give them a good start to life.
If they follow my advice, live within their means, make smart decisions, they will have more than enough to have a happy life.

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2 thoughts on “Sorry kids, no 529 for you. But I may have something better…

  1. Interesting idea. There seem to be a couple of things that I’d be concerned with going down this path.

    1) If you live in a state where you get a tax advantage for a 529 you’ll be missing out on a write-off. If we’re assuming you’re position is neutral then that means you’ll have put less money into the investment account you’re setting aside to fund their retirement.
    2) Assuming you’re saving the money in a taxable account so you can move it to their account later, you’ll be taking a capital gains hit when you cash out unless there is some work around I don’t know about. I wonder if it would be better to gift the money first and invest it on their behalf. Of course, you’d be counting on them to implement the retirement investment since it would be their money. Also, they’d have to pay the capital gains and miss out on the tax free gains from the 529.
    3) To put $18500 or whatever is allowed when they start working into a tax-deferred account they’ll have to work for an employer that has that option. Otherwise, you’ll be stuck with a traditional IRA and Roth IRA combo.

    I suspect that if they go to college that this would work out to cost more when just thinking about the math. On the other hand, it’s an interesting psychological experiment. Perhaps because they’ll be bearing the cost, they’ll be more frugal. Still there are many examples of people taking out massive amounts of student debt they cannot afford, so you’re definitely depending on you teaching them a good ethic on spending. And if that works, why not just use the 529?

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  2. Bingo! This is the winning strategy. It truly is all about psychology. We did everything right by using grandparent-owned 529s, but because they had no skin in the game our kids didn’t take college seriously and both dropped out after 3 years. After being in the workforce 6 mos. the oldest has decided to go back. He has one year left on his 529 but I’m making him pay for it and he will be reimbursed if he gets straight As.

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