When to Begin Investing for a Child's Education

I do not have any children.

I am, however, planning to have children at some point in the future. It is part of my long-term vision for my life, despite endless stories from co-workers who seem to have such a difficult time with their own. (These stories are always followed by a confession that they are glad they had children anyway, etc.)

A frequent Consumerism Commentary reader, someone close to me, read my articles about my plans for charitable contributions and offered some advice, paraphrased here.

I see from your web site that you are contributing a significant amount of your salary to charity. While laudable, have you thought clearly about this? One of the big mistakes I made was not to put money away for my children’s education. Not only did the loans end up being a burden on their Mother and I, but on them as well.

How may years have you been paying off college loans? Don’t you think that your life would be different now if you did not have to worry about college cost. If I were you, I would consider starting an education fund. There are tax benefits and other advantages and disadvantages to consider. Imagine the relief of not to having to worry about your eventual kid’s education.

I’ve always believed that parents should take steps to ensure that their children do not have to burden themselves with excessive work while attending high school and college in order to pay for their own education. While some “ownership” of their education might be a good thing, possibly motivating them to not waste their own money, I think that this is a time when students need to be full-time students without distractions, especially those causing unnecessary steps.

I want to be able to provide any educational opportunity for my future children. The most popular account type is the “529 Account,” named after the tax code that allowed its creation. The 529 Account would allow me to maintain control of the funds, even after the hypothetical children turn 18 or 21 years old. The investments would grow tax free. As long as the funds are withdrawn for qualified education expenses, I would avoid federal tax, possibly state tax, and any penalties.

The only downside is the chance that I don’t have children or my kids decide not to attend college. I would be able to withdraw the funds from the 529, but I will owe tax on the earnings and a penalty fee. The other option is to name another family member as the beneficiary.

The 529 appears to be the best choice for investing for education, but I’d like to have a more definitive plan on the issue of having children, particularly pertaining to the timing. (I would say right here that I should probably be careful what I ask for.) If anyone else asked me, I would say it’s never too soon to start investing for the future education of children who are merely hypothetical, but a potential 10% federal penalty tax does not seem inviting.

To the reader’s question about investing for education versus charitable giving, I would like to do both. I guess I should work harder now, while I have fewer “life” responsibilities, to try to build up more income to cover as many bases as possible. Even if I don’t open a 529 Account right away, I can designate a certain amount of savings each month towards this goal.

Photo credit: CarbonNYC