Should You Open a 529 Fund or Trust Fund for Your Child’s Future?
Is college tuition overpriced or still worth the target price? And if it’s too expensive, what better than a 529 account to set your child up for success? Here’s what we’re watching this week.
Each Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week a question from Katie:
My first child was born two months ago and I would like to start saving money for her future. At first I planned to open 529, but now I think that a trust fund might be more useful. (I am concerned that a college degree is overrated and that my daughter may not even want / need to go to college by the time she turns 18).
I’d love to see a comparison of the pros and cons of each approach.
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Be careful with trusts
The benefits of a trust are clear: it offers much more flexibility in allocating funds than the 529 plan, and you can decide when your child will receive funds. But, according to student loan expert Mark Kantrowitz, the trust has two major drawbacks: tax implications and financial aid.
The money in 529 accounts grows tax-free and will not be taxed if deducted for educational expenses. This is a huge breakthrough. And as of 2018 , you can use up to $ 10,000 a year to study at a public, private, or religious elementary or high school.
Then there are financial aid considerations. Most trusts (with the exception of court-ordered compulsory trusts) must be reported when your child completes the FAFSA and will reduce eligibility for needs-based financial assistance by 20 percent of the value of the assets.
“Compare that to a student’s or parent’s 529 plan, which scores on a scale in square brackets that lowers eligibility by up to 5.64 percent,” Kantrowitz says. “$ 10,000 in the trust will cut student aid by $ 2,000, and $ 10,000 in the 529 plan cut student aid by a maximum of $ 564.”
So if there’s even a chance your child will go to college – more on that below – than 529 is probably a safer bet.
If you are unsure, you can also look into creating a Roth IRA if your income is below the cap that does not count towards the FAFSA and has a penalty exemption for education costs. “As long as they do not receive any payments from the Roth IRA, this will not affect eligibility for assistance,” says Kantrowitz. “If she doesn’t go to college, it will give her a head start in retirement savings.”
If you’re still interested in learning more, Investment News has a handy breakdown of the types of trusts you can create.
Redefining the College Question
However, a college degree will still be your daughter’s best earning factor for a successful career. “Beware: If a parent thinks their child will not go to college, that could be a self-fulfilling prophecy,” says Kantrowitz.
The Bureau of Labor Statistics reports that graduates from the four-year college receive an average weekly salary of $ 1,286, while those with a high school degree receive an average weekly salary of $ 713. And while 36 percent of Americans are getting a bachelor’s degree or higher, 8.4 According to CNN Money, in 2016, of the 11.6 million jobs created since the Great Recession, millions went to people with at least a bachelor’s degree.
But that doesn’t mean you need to save tens of thousands of dollars to get your daughter into a less lucrative field, if that’s important to you. And, as I wrote here , there are many options that go beyond what we might call “traditional” higher education. There is a community college, technical schools, and more. Even attending a public school in your state can significantly lower your costs compared to other options. Your child may want to consider taking a break from the year.
There is no doubt that college tuition costs are spiraling out of control, and it might seem like it might not be worth the price. But all the evidence points to college is still the best way to get into more lucrative jobs for most people. So don’t overdo it with college education just yet. Explore your options for help, contribute to 529 if you can, and most importantly, make sure your child knows they have options.