Opening a 529 when I don't have kids
March 24, 2008 8:21 AM   Subscribe

I'm in my mid-20s, and having worked several jobs (often a couple at a time) through college and grad school, I would like to avoid the same fate for my (future) children. Can I open a 529 and start saving without having any kids?

I live in DC, which offers what seems to be an excellent 529 plan with no fees, with a contribution of $25 min a month.

Can I start a 529 with no kids (or none on the way, either?). I'm not married or even in a LTR right now, but I'd like to start saving. I almost certainly plan to have them.

Do I just set myself up as the beneficiary? Along those lines, what if I don't have children - am I able to withdraw the funds, or use them for future education down the line?
posted by waylaid to Education (13 answers total) 3 users marked this as a favorite
Yes, I think if you google this you will find that you can set yourself as a beneficiary. Either you can, or you can't.
posted by thomas144 at 8:43 AM on March 24, 2008

Response by poster: I have googled it, and that *seems* to be the case, but I wasnt sure what caveats there might be.
posted by waylaid at 8:56 AM on March 24, 2008

You can setup the 529 with yourself as the beneficiary and a family member as a contingent beneficiary. If you never have children the money can be used for a relative's education. If that doesn't apply then you could always cash out the funds for non education purposes but take a tax hit. I currently have a 529 setup this way.
posted by curlyelk at 9:17 AM on March 24, 2008

I don't really understand what advantage there would be to setting up a 529 rather than an IRA as a savings vehicle, unless there is some special tax advantage in DC.

As a parent of a 20-year-old in college I guess I don't really understand the premise of your question: what fate is it exactly that you are trying to spare your future children from?
posted by thomas144 at 9:45 AM on March 24, 2008

Response by poster: @thomas144: I paid pretty much my own way, my parents didn't have that much saved up for college. I got a lot of scholarships and need-based financial aid, but the debt has limited a lot of things I could do.

As far as IRA v. 529 - don't you pay tax on IRAs when you withdraw the money? You don' for a 529.

I'd like to start saving early for my children - I'm a bit confused why that seems confusing to you?
posted by waylaid at 10:13 AM on March 24, 2008

Set it up with a trustworthy relative as the beneficiary, then change it to your kid when they are born.
posted by charlesv at 10:25 AM on March 24, 2008

As far as IRA v. 529 - don't you pay tax on IRAs when you withdraw the money? You don' for a 529.

You do pay tax on a 529 when you withdraw. The assumption is that your kids will be at a lower tax bracket in college when they withdraw, however.
posted by Gucky at 11:17 AM on March 24, 2008

Response by poster: Gucky,

I don't think so. What do you mean?

  • Savngs are federal-tax-free and may be free of taxes in other jurisdictions as long as the money remains in the account.
  • When funds are distributed to pay for qualified higher education expenses, the distributions are exempt from federal, DC, and most states' income tax.
  • Generally, money in a DC College Savings Plan account is not considered part of the account owner's estate for federal estate tax purposes.
  • You can contribute up to $12,000 annually - or make a one-time contribution of up to $60,000 - free of gift taxes.

  • posted by waylaid at 12:00 PM on March 24, 2008

    As far as IRA v. 529 - don't you pay tax on IRAs when you withdraw the money?

    Traditional IRA, yes; Roth IRA, no.

    You do pay tax on a 529 when you withdraw.

    No, you no longer pay federal taxes on earnings for qualified withdrawals. You may be thinking of the old rules, which were changed in 2001 (originally scheduled to sunset in 2010 but made permanent in 2006). Your state taxes may vary.
    posted by celkins at 12:14 PM on March 24, 2008

    I realized right after I posted my earlier message that of course 529 funds can be used tax-free to pay for educational expenses, so I'm sorry if I sent the thread down a rathole. :-) Maybe if you set up 529 plans for potential children this will act as a magnet to attract a rich spouse, which is a more conventional way to pay for your kids' college.
    posted by thomas144 at 1:56 PM on March 24, 2008

    529 caveat: Remember that if you are expecting your child to receive *any* financial aid, the 529 funds will be deducted from the amount of financial aid, and not from the out-of-pocket portion. In other words, If you have save $10,000 in 529s to pay a $25,000 in tuition, and qualify for $15,000 in financial aid (leaving $10K in out of pocket), the school will use the $10K in 529 funds to offset the financial aid and you will STILL have to come up with $10,000 out of pocket. If you save that money in regular savings accounts, they will offset it only 35% if the asset is the student's and only 2% if the asset is the parent's. (This will probably change before your yet-to-be-born child reaches college age). If you cannot save the full cost of tuition in 529s you may be better off just sticking it in long term CDs, treasury bonds or savings bonds in your own name. I would definitely consult a financial specialist before you assume that 529s are going to save your kid from college loans.
    posted by nax at 2:57 PM on March 24, 2008

    Response by poster: @nax:

    I don't think that's true. 529s are treated as a parental asset.
    posted by waylaid at 8:30 PM on March 24, 2008

    Thanks waylaid. However, even if they are treated as a parental asset, I know for a fact that at least one liberal arts college (Oberlin) will deduct the 529 balance dollar for dollar off the kid's financial aid packet, as opposed to non-tax protected parental assets, which they treat at the more typical 2% rate. I know this because they told me so. My bank also told me this when I first investigated 529s. Whatever the gummint propaganda on this is, the reality is that 529s seem designed only to help people who can save the whole nut anyway. In other words, it is tax policy that benefits the rich by making their kids' expensive tuition tax deductible.

    Again, I strongly suggest that anyone looking at this route examine the option closely before making this choice. (don't take my word for it, IANAFinancial Advisor, but please don't just buy the propaganda)
    posted by nax at 5:15 AM on March 25, 2008

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