3 Alternatives to 529 Savings Plans

3 Alternatives to 529 Savings Plans

3 Alternatives to 529 Savings Plans | brokeGIRLrich

Maybe you’ve found 529 Savings Plans aren’t for you. Maybe you’re uncomfortable about earmarking all that money as “college only,” because maybe your kid is not college bound (and really, that’s not the end of the world – check out this great article on trade schools). Maybe you live in a state with no income tax, so those tax breaks everyone raves about don’t apply to you. Or maybe you live in a state that just has crappy tax breaks for 529 Savings Plans. Maybe you just think the number 529 is unlucky. Who knows. Whatever the reason, if you’re looking for some alternatives to 529 Savings Plans, I’ve found a few for you.

Coverdell Education Savings Account (ESA)– these are like 529 Savings Plans’ little sister. If your kid is under 18 and you make less than $190,000 to $220,000 jointly or $95,000 to $110,000 on your own, then you can contribute $2,000 annually for each child. With an ESA, that money becomes the beneficiary’s (your child) and can never be returned to you; however, you do have full say over how it’s invested. The money has to be spent by the time the beneficiary turns 30 or it will be turned over to the beneficiary and taxed. It will also get hit with a 10% penalty. You are able to transfer an ESA to another beneficiary, but many ESA’s require that the beneficiary change the name another beneficiary. So hopefully your kids get along well enough. If you have extended family helping to fund Sally’s higher education, you still have to make sure that all ESAs in her name don’t exceed $2,000 per year or she will have to pay a 6% excess tax on any extra money. One major perk to ESAs are that they can also be used to cover primary and secondary education costs, so if you were thinking of sending the kids to private school, this is a good vehicle to help save for that.

Roth IRAs – now there is a large body on personal finance literature out there that advises you not to touch your retirement accounts to pay for your kids college education. However this Roth IRA would be set up in your kid’s name. You would need to fork over the money, which can contributed up to their taxable income or the Roth IRA limit ($5,500 a year), whichever is lower. So if Junior has a part time job and earns at least $5,500 a year, you can use a Roth IRA in his name to save that much and he can withdraw it to pay for school. Another option is to pay your kids $5,500 a year to do domestic chores and have that money put right into their IRA. A perk to this is that if Junior doesn’t need that money for school, he’ll have a great head start on a retirement account or be able to tap into it for a down payment on a house.

 Stock Market Investments – one investment advisor from Florida, Margaret McDowell, recommends using ETFs and dividend-paying blue chip stocks to fund your kid’s college education. You want to choose “safe” stocks and ETFs with low volatility. McDowell recommends ETFs like PowerShared S&P 500 Low Volatility, PowerShares Emerging Market Equity Low Volatility or PowerShares International Developed Markets Low Volatility (notice a trend?). Some blue chip stocks with good dividends that are worth looking into include Southern Copper Corp (SCCO), AT&T Inc (T), Lockheed Martin Corp (LMT), Paychex Inc (PAYX) and Cola-Cola (KO). Keep in mind, the stock market is still the stock market – invest at your own risk. If you choose to go this route, it’s best to put the investments in your name and cover the capital gains taxes yourself, although they’re really not too onerous considering that you get to spend the money however you choose. If your kid opts not to go to college or hits one out of the scholastic ballpark and gets a free ride, that money is yours to use however you see fit. You can also invest as much as you want, with no cap on your investments.

 

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12 thoughts on “3 Alternatives to 529 Savings Plans

    • Yeah, it’s considered a qualified expense – the same as purchasing a first house or certain hardship situations. They need to be careful though about making sure they only use the money from their IRA for qualified expenses like tuition and room & board and not spring breaking it up in Cancun.

    • Well to start with, you can open a 529 for you kids at any age, but for an IRA, you can only contribute as much as they make – so for a teenager, you could “pay” them to do chores and household work and have that money go into their IRA, but it would also need to be reported and taxed like income.

  1. Another option is to of course not pay for their higher education, which not only saves the parents a ton of money but can actually benefit the child by forcing them to view college as an investment they are responsible for seeing grow.

    • That’s true. A definite option is to not pay for school, and pretty much everyone I’ve ever met who did not receive assistance from their parents but still managed to get their degree were hard working folks who are always seemed to have very good money skills.

  2. These are great alternatives. I don’t like 529s because I’m not sure all of my kids will go to college or trade schools. If they don’t, I don’t want to transfer it to someone else, I still want them to have it, but with limitations. I like your first option, it sounds more like what willw ork for me. I’ll have to read more about it. Thanks for sharing and linking up with Countdown in Style! Don’t forget to come back on Friday to see if you were featured!

    ~~April~~
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  3. I actually never though to do a 529 plan for my kids, but then again, my husband and I aren’t at the point where we are trying to start investing just yet. I have thought about stocks briefly and I knew about Roth IRAs because I was in payroll. That also sounds like a great option with putting it in your child’s name, etc. Thanks for sharing these awesome tips with us at Countdown in Style!
    Brittnei recently posted…Whole Wheat Mac-N-CheeseMy Profile

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