A few minutes ago I sat down with my five (almost six!) year-old niece. I explained to her that instead of getting her a toy or clothes for Christmas, I put money into an account that she can use for college.
I’m referring to her 529 account.
A 529 account is just tax deferred savings account for educational expenses. You can open one in any state, put money in, and let that money grow until the person using the money is ready to spend it on qualified educational expenses. I set one up for her when she was two years old.
A qualified educational expense can be anything from tuition or books to on-campus housing or a new laptop, or probably even a mind reader or whatever they have when she’s 18 years old.
Every year I sit down with my niece and tell her that she can only use this money if she goes to college. Otherwise the money is subject to a tax and a penalty, and it’s gonna go to some other kid in my family who is going to college.
She’s the cutest little thing in the whole world and everyone buys her toys and clothes; I feel like she doesn’t need any more. I even sent out an email to my whole family making them aware of the account a few years ago, suggesting they contribute to the 529 instead of buying presents. Guess how many contributed?
Only her grandma.
The lesson to learn here is that if your family is anything like mine, there will be more than enough people buying kids toys and clothes they don’t need. Why not take what you would have spent on those toys and give the kid something he or she will actually need later in life?
Plus, I’d rather be the favorite uncle when my niece is old enough to babysit my (future) kids than when she’s five years old. (Although, she was pretty excited to tell her grandma that she had $4,400 {it’s really just $440})
Have you opened or contributed to a 529 for a young relative? If not, do you plan to?
Kevin McKee is an entrepreneur, IT guru, and personal finance leader. In addition to his writing, Kevin is the head of IT atย Buildingstars, Co-Founder of Padmission, and organizer ofย Laravel STL. He is also the creator of www.contributetoopensource.com. When heโs not working, Kevin enjoys podcasting about movies and spending time with his wife and four children.
I totally agree Kevin! Considering the cost of education isn’t going to come down, the sooner we do this for our kids the better.
For every toy you buy, put the equivalent in a 529!
It definitely helps with the cost of education rising. It also helps my niece a lot because I’m 99% sure she’s not gonna have a lot of financial help when she gets to college.
Bravo for you Kevin! That’s really sad that only you and her grandma are saving for her future. It really shocks me when I think about how materialistic and focused on instant gratification we can be. She’ll be thanking you later, believe me. No one saved anything for me, so now I’m paying back a decent sized loan. ๐
I actually had a nice uncle who bought me some savings bonds that I used for car payments during my freshman year of college, but other than a few hundred from him, I had to take out loans for stuff too. I know I won’t be able to pay for all of her college, but even just a little to help pay some bills will be worth it.
I approached my sister with this idea for her kids and she actually said no, giving some b.s. reason about not wanting to be a charity and that her kids would do just fine without my help thank you very much.
My sister and I don’t see eye to eye on many things.
So I encourage you to keep doing this Kevin. Kudos to you.
I just want to make sure you’re aware that you don’t need mom’s consent to open an account for your nieces and nephews. ๐
She’d never have to know (at least not until they are in college).
Good point. However since they are her kids, I respected her wishes. I’m sure they enjoyed their toys. ๐
Maybe I could enlist you to send that email to my family. Seriously my kids got loot to boot this year. I have only recently stopped hyperventilating.
Great idea and good for you for starting the trend!
Kevin- I’m that guy in my family too! Kids get plenty of gifts and college savings is too often overlooked. They may not love it now, but they’ll thank you later.
This is great to see. I’m actually going a slightly different route with my soon-to-be-niece. Her parents have opened a 529 and they keep it well funded. With her college taken care of, I will instead open a UGMA custodial account that she will get after college.
I personally found the time immediately after college the hardest. During college bankswill at least lend you money. After college there are so many expenses (car, housing, work warderobe) and no money coming in yet. Although the UGMA is not a tax advantaged account, she will avoid paying the tax penalty and will start her professional career with a 6 month e-fund in place.
I’m in South Africa and we do not have an equivalent of a 529 here but I have opened an Exchange Traded Fund account for my son and am putting an amount away every month for his tertiary education one day. At 8 he doesn’t quite get it and he would still rather have the money now as pocket money to spend on toys and games. This is not his call and I know it is the best thing I can do for him to provide the funds for his further education.
Helping child save money when they are still young is the best practice that each parents can teach to their children. This 529 account concept is great and every one can actually apply to this kind of savings account and prevent buying unnecessary things.
“I explained to her that instead of getting her a toy or clothes for Christmas, I put money into an account that she can use for college.” – This is an excellent idea! I’m sure your niece will be very thankful to you once she grow up. I wonder why only her grandma contributed to her 529 account. Perhaps other people don’t understand importance of this.