A Prenatal College Fund?

My daughter will not be born until September, but a few days ago, I opened a 529 college savings plan in her name. Just as with my son, I’m contributing $75 a month to it, plus any cash gifts they receive until their sixth birthday, plus a small birthday gift for each one until their sixth birthday (after that age, the decisions move more into their hands with my guiding influence). I plan on paying in until her eighteenth birthday, the same as my son.

How long is that? According to my calculations, she will likely be a part of the high school class of 2025 (looking at that number almost makes me shudder).

How did you set it up? For now, the 529 is literally in my name. Upon her birth, I will set up a custodial account in her name and transfer all savings to her. Since the amount will be small (less than $12,000, obviously), it will not have any tax consequences.

Why did you set it up? The earlier I get started on my daughter’s savings, the longer she will have to have compound interest work in her favor. For example, using an estimated 10% annual return, let’s say I put in $50 a month starting at her birth and stopped contributing at age six; in comparison, let’s also say I started putting in $50 a month starting on her sixth birthday until she was eighteen. I end up with significantly more money in the account following the first route – the power of compound interest is very powerful.

How will it turn out? Contributing $75 a month starting three months before her birth, and assuming a 10% annual rate of return, she will have $46,866.29 in the account on her eighteenth birthday. That’s assuming no additional contributions, no gifts from other family members (especially early on), and no birthday gifts from me. My son is actually substantially ahead of this pace and is looking at about $60,000 when he turns eighteen.

Isn’t prenatal a bit excessive? By contributing that $75 for just three prenatal months, she’ll have $1,373.70 more in her 529 college fund on her eighteenth birthday than if I just started when she was born. That’s cash that she will definitely be able to use when that time rolls around, even if college isn’t her choice.

My advice to all expectant parents is to buy your child their first gift as soon as possible – start a college savings fund for them and set up automatic contributions, especially if the child isn’t born yet (by setting one up in your own name to transfer later). This money will help them finance their education down the road without sinking you into debt with a monster loan when the day comes. Plan ahead and everyone will have a happy future.

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