A+ for Effort

Charles Schafer

WE HAVE A PROBLEM: We may have saved too much for our daughter’s college education.

My wife and I started contributing aggressively to our daughter’s 529 college savings account as soon as she was born. For the first two years, we invested the full amount of the annual gift-tax exclusion, which was then $14,000. Now, the exclusion is at $16,000, but lately we haven’t been saving as much as we used to. The reason: Our early aggressive saving, coupled with gifts from relatives, mean the account can already cover a couple of years of in-state college tuition—and our daughter is only five.

You may be asking yourself, “How is that a bad thing?” The simple answer is, we could have done any number of other useful things with the money. For example, we could have used it to save more for retirement. There’s plenty of financial aid available to help students pay for college—loans, grants, scholarships, work-study—but no such thing as financial aid for retirement. Unless retirees opt for, say, a reverse mortgage, they can’t take out a loan because they didn’t save enough in their 401(k). That’s why experts say you should always make retirement savings your top financial priority, even at the expense of your kid’s college account or your homeownership dreams.

For our daughter’s college savings, we could have used another financial vehicle, such as a Roth IRA or a custodial account set up under the Uniform Transfers to Minors Act. That way, we would have had more flexiblility in how we use the money. With a 529, if we don’t use the account for qualified education expenses, we’ll face income taxes on the withdrawals, plus a hefty 10% tax penalty.

So why did we do it? Why were we so worried about paying for college? Because of my personal experience.

To pay for college expenses, I had stocks left to me by my grandparents. That helped my parents and me cover college costs without taking on student loans. It was a wonderful gift that I’ll always appreciate—and it’s one I’d like to give to our children as well.

Our children’s education is one of our family’s most important financial goals. We wanted to make sure we were on track early. We’ve now met that goal. Even if the market only returns 4% per year between now and when our daughter graduates high school, we should be able to pay the full cost of college with her 529 savings. On top of that, if we continue to save more than we need or our investments perform better than expected, the 529 can always be used for the education of future grandchildren.

Still, looking back, maybe investing so heavily in a 529 wasn’t the optimal decision. But not having to worry about one of our most important financial goals has lifted a weight off our shoulders.

If you find yourself in the same boat as us, and you saved too much for a financial goal, my advice is to stop worrying about the choices you made. Instead, be happy that you’ll achieve your goal. Let’s face it: It’s better than the alternative.

Charlie Schafer is an aerospace engineer with an interest in personal finance and investing. His other hobbies include reading widely and homebrewing beer. Charlie lives with his wife and two children in South Philadelphia.

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