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Preconceived Notions

Jonathan Clements  |  October 28, 2017

I JUST INVESTED $1,000 on behalf of a grandchild who may never be born. This reflected two of my enduring preoccupations: figuring out the best way to use my limited wealth for my family’s benefit—and getting an early start, with an eye to squeezing maximum advantage from investment compounding.

To those ends, when I visited my daughter in Philadelphia last weekend, I helped her open a 529 college savings plan. Hannah humored her father by committing to invest $25 automatically every month. Her fiancé calculated that if they saved a tad more—$500 a month, to be precise—they’d have $212,000 after 22 years, assuming a 4% real rate of return. That’s the sort of sum you need to get a child through a private college these days. To get things rolling, I tossed in an initial $1,000 and plan on adding more in the months and years ahead.

But this isn’t just about dollars and cents. It’s also the power of example. This year, in addition to opening a 529 for Hannah, I helped her and her brother fund their retirement accounts. I also set up accounts for my two stepdaughters, with the money earmarked for a future house down payment. Along the way, all four kids will—fingers crossed—learn a little about investing and the benefits of thinking long-term, and I get to pass along the values I think are important.

For now, Hannah’s 529 plan will be split evenly, with half the money going into a low-cost U.S. total stock market index fund and half going into an international index fund. Hannah is the owner the account. Who’s the beneficiary? For now, that would also be Hannah.

What about the grandkid who doesn’t yet exist? According to IRS Publication 970, you can change the beneficiary of a 529 to another family member, including a child, stepchild, sibling, step-sibling or cousin, without triggering income taxes or tax penalties. What if Hannah never has a child? She can always name a niece or nephew as beneficiary.

I could, of course, have opened the account myself, named Hannah as beneficiary and then later changed the beneficiary to a future grandchild. But under current rules, 529 plans owned by someone other than the parent can badly hurt financial aid eligibility, so it seemed smarter and simpler to have Hannah as the account’s owner.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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