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Over the course of my children’s tender years, we had five pet rats.  Two at first and then three replaced those.  All rescues (yes, rat rescues are a real thing).  Rats are billed as “perfect pets.”  They don’t require a lot of space, time or expense.  They are clean and neat.  They are social, learn their names, and love to interact with humans.   What’s not to like?

My favorite was Oreo.  In her last year, she would curl up in the bend of my elbow and lean her soft, warm, little body against my rib cage, and I would stroke her back and her head for sometimes up to an hour.  Sounds kinda sweet, doesn’t it?


The 529 Is Not the Perfect Pet

Like pet rats, the 529 plan is billed as a perfect investment.  Put in after-tax money, let it grow tax-deferred, and if you pull money out under prescribed rules, the withdrawals are tax-free.  You probably know someone who had a great experience with one.  What’s not to like?

Problem is, you don’t know until you’re knee-deep into the commitment.

Here’s what’s not great about pet rats:  The cage will take up more space that than you care to relinquish, their urine and feces still smells, cleaning the cage takes up a lot of time, the kids likely won’t help like they promised, and vet visits are pricey if you can even find a vet who can treat a sick rat.

Here’s what’s not great about 529 plans:  Just because you funded one doesn’t mean your kid goes to college, you can typically only change investment options once a year, it will likely not cover all of the college costs, and spending the money on the “wrong” things costs you penalties and possibly higher taxes.

For you, the 529 cage might be the wrong size, smelly, and your kids may be no help at all.


Alternatives to the 529

I think what people like about the 529 plan is that it is money specifically set-aside for college.  There’s something mentally appealing about the segregation, and it’s harder to raid the funds in a weak moment when it has little Lizzie’s name on it.

But there are lots of other ways to accumulate assets that can be psychologically earmarked as a college fund:

  • A stock/bonds account that can be later transferred to a child to pay for college or pay off student loans.
  • Real estate is hugely popular, especially if purchased before a child is born or is very young. Use the rental income or sale proceeds to pay for college.
  • Being self-employed and employing your child during the summer has wonderful tax benefits for college funding.
  • Some retirement plans allow for withdrawals for college expenses without penalty. You can fund these for your kid if they work while in K-12 and have earned income.

This list goes on.

The 529 is not the be-all-end-all of funding a college education.  If you are going to use one, be judicious about how much you put into it.  While the rules around 529 money have changed over the years (you can even fund a Roth with them now under the right circumstances), the last thing you want is money earmarked for college that will never be used for such.

Focus on the Outcome You Really Want:  A Happy Kid

We loved our rats, but in truth, what we all really wanted was a dog.  At the time, I was unwilling to take on the responsibility or the commitment.

What you probably really want is for your kid to grow up to be successful, confident, resilient, financially self-sufficient, and happy.  College may or may not be part of that path.

I suspect that what you really want for yourself is to grow up to be funded for retirement, confident, financially self-sufficient, and happy.  Flexibility and options are key, and the 529 doesn’t have much flexibility or options.  Choose it wisely.

If you want to talk more about college funding, please reach out.


Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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