529s and Coverdells, Really?
To quote Eric Cartman, “No…no, God no!”
What if I told you that every dollar you put in to your 401(k) would still be yours, but you could only access it if you moved to Florida or California? How many of you would still invest in such a plan?
Since no one would enter in to such a plan, I really can not comprehend the fascination people have with 529s and Coverdell IRAs. So, rather than start with any premise at all, let us start from the beginning. To do this well, I will break up the discussion in to two posts: whether to fund education or not and if so, how best to do it.
To fund or not fund a child’s education
What is more likely, that your child can get a scholarship of some kind or that the government will subsidize the retirement of your dreams? It amazes me how often people undervalue how much money they will need in retirement to maintain their current lifestyle. Since this is not a retirement tutorial, let us just assume that you will need a lot of money in retirement. Some people, even maxing out a 401(k) and Roth IRA, may come up short in what they will need to maintain the same standard of living in retirement as they did when they working. We can also assume that most people are not maxing out both vehicles.
Obviously, it is more likely that a child will get scholarships either need or academic based. There are literally 100s of scholarships available and often the money goes unclaimed. The money is there; it just needs to be found. On the other hand, you only get a small window of time to accumulate assets to retire. Once that window is closed, you better have enough or your lifestyle will be changing drastically.
The bottom line is that there are ways to fund a child’s education with dual use options. The idea being that if the money is needed for your retirement, you can access it for that and if it’s not, you have some great tools set up to help with the educational needs of your children. Either way, there is no need to use these governmental programs when other (and better) scenarios exist.
Stay tuned for Part II and “How Best to Fund Your Child’s Education”.