A Different Approach to College Savings
The rising cost of college education has many parents scrambling to save enough money for their children’s future. For most, a 529 plan is the go-to solution, offering tax advantages when funds are used for qualified education expenses. But not everyone is following this traditional route. Personal finance expert and Instagram personality, Eryn Schultz (@her.personal.finance), is intentionally underfunding her child’s college savings—and for good reason.
Saving Strategically for Public School
Schultz, who herself attended a private university and took on student loans, has decided to save only enough in a 529 plan to cover the cost of a public college. She deliberately avoids saving for a more expensive private institution in the account.
“If I save for private school and my kid goes to public or decides to be a YouTube creator, we would owe taxes and a penalty on any money not used for qualified education expenses,” Schultz explained. Her strategy is grounded in the reality that a child’s educational path may not align with traditional expectations.
There are numerous scenarios where a child may not fully utilize a 529 plan: receiving scholarships, starting at a community college, or choosing an alternative career path. In such cases, unused funds could be subject to taxes and penalties, making Schultz’s strategy a cautious and flexible one.
Understanding the 529 Plan
A 529 plan is a tax-advantaged savings account designed to cover education-related expenses such as tuition, room and board, books, and supplies. While contributions are made with after-tax dollars, the capital gains are tax-free if used for qualified expenses.
However, if funds are withdrawn for non-educational purposes, the earnings portion is taxed as income and typically incurs a 10% penalty. This can result in financial consequences for families who save more than needed or whose children choose non-traditional paths.
Saving Beyond the 529 Plan
Schultz advocates for saving additional funds outside of the 529 plan. “I would rather save additional dollars outside of a 529 that can be used for a house down payment, a business or something else entirely,” she said.
This approach offers more flexibility. Assets saved outside of a 529 plan can be used for a wider variety of life goals, and while these investments may be subject to capital gains tax, they avoid the steep penalties associated with 529 plan misuse. This method also allows for dynamic financial planning as children grow and their interests evolve.
Rollover and Reallocation Options
While the concern about penalties is valid, it’s worth noting that recent changes have introduced more flexibility to 529 plans. For example, up to $35,000 in unused 529 funds can now be rolled over into a Roth IRA in the beneficiary’s name. However, this can only be done up to the annual Roth IRA contribution limit, which is currently $7,000. Additionally, some states may still tax this rollover.
Another option not mentioned by Schultz is to change the beneficiary on the 529 plan. If one child doesn’t use the funds, they can be reassigned to a sibling, cousin, or even a future grandchild. This keeps the funds in the family and earmarked for educational purposes.
Graduate School and Other Uses
Unused funds in a 529 plan don’t necessarily go to waste. They can also be applied to graduate school, should the student decide to pursue advanced education. This offers another layer of flexibility, albeit still within the confines of educational use.
Still, Schultz’s point stands: tying up large sums in a restrictive account can be risky when life is unpredictable. Her strategy reflects a growing trend among young parents to maintain financial agility while still prioritizing their children’s futures.
Planning Ahead with Intention
Thinking about college savings while your child is still in diapers might seem premature, but early planning is essential. Schultz’s approach shows that being intentional and flexible can be just as valuable as saving aggressively. By balancing a 529 plan with other types of savings, she’s positioning her family to handle a wide range of future possibilities—college-related or not.
For parents unsure about how much to save or where to save it, Schultz’s strategy offers a compelling alternative. Rather than overcommitting to an educational fund that may go unused, she’s choosing a balanced approach that keeps options open and penalties at bay.
This article is inspired by content from Original Source. It has been rephrased for originality. Images are credited to the original source.