Updated on 07.02.07

A Prenatal College Fund?

Trent Hamm

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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  1. Paul says:

    Can’t you change the beneficiary of the 529? I know the one I setup for my daughter allows me to transfer it to another person if I so desire, although, that may be a state by state thing.

  2. Bubs says:

    Great article and a very smart idea. Just one question that I have isn’t 10% annual return a year, every year till 18 a lot to ask for?

  3. Jason Wallis says:

    Is it bad once you have the second kid to just have one account that can fund college for both of them?

  4. Brad says:

    You should address even more frugal alternatives to college education than the current system. Paying inflated rates to fund several years of partying is also not a great idea. :)


  5. savvy says:

    I wouldn’t put the money in your daughter’s name, it counts against their FAFSA even more than if it is in your name or another relatives name.

  6. Wendy says:

    Very happy to see other people have considered this kind of early start. I don’t plan to fully fund my future childrens’ educations 100% mainly because I think working for my education was one of the best experiences I had. However, starting now (pre-prenatal!) still costs me less (for whatever funding amount we decide is best), because we have more flexibility with our budget as dinks than we will as a family on a single income.

  7. sunny says:

    What will the impact be if she doesn’t go to college. I was under the idea that 529 accounts can ONLY be used for education. What penalties will there be, etc?

  8. Mardee says:

    Trent, you should think twice before changing her 529 account to a custodial account in her name. For one thing, withdrawals from 529 college investment plans are completely tax-free, if the money is spent on qualified educational costs. In addition, assets held in UGMA custodial accounts are considered student assets for purposes of financial aid, unlike 529 plans. And since students have to kick in a much larger portion of their assets than parents do, it’s much better to keep the student’s assets as low as possible.

  9. Mardee says:

    I should also add that even if you were to keep the 529 account (and maybe that’s what you’re talking about in your post), you should still keep it in your own name rather than your daughter’s. Same for your son – if you haven’t transferred it yet, don’t. It will help both of them when it’s time to apply for financial aid.

  10. Mitch says:

    Must be early September, like a lot of people I know (9/6 seems to be the most popular date in my circles). September babies may be 2025 or 2026, depending on the state they start school in and when in September they are born, and I think Iowa’s cutoff is September 15th.

    I.e. if she is born a day after the cutoff she may not be allowed into kindergarten the fall she turns five/first grade the fall she turns six. Sometimes you can get around this by enrolling in a private school for a year or two, or by petitioning for advanced placement. I often think parents with kids soon to start in kindergarten, moving to a new school/district, or starting college should find a “mentor” with kids a few years older. The district personnel are often too busy to give more than the most generic instructions, so that person can to help them walk through the system.

  11. guinness416 says:

    Once again, I thank my lucky stars for being born Irish.

  12. Sharon says:

    Well, to wonder off the subject of 529’s to the subject of enrolling your child in school….
    I would try to enroll her in the “late” year, rather than squeezing her in early.
    I started school in Canada and was entered into my grade because I had my birthday three weeks before the cutoff.Then we moved back to the states. Academically, I was fine, but I was a late bloomer and since I was not as co-ordinated as my age-mates, the difference really showed up with my classmates. And I was the last one to get my permit and a whole host of other “coming of age” things.
    Remember that school is about more than academics. You can enrich her life with academics at home and with classes. It will just help her stand out better with her peers. But you can’t legally get her a driver’s license early so she can fit in with her peers…

  13. Derek says:

    As far as the 529’s go, you should look into having your parents (their grandparents) own the account. Your children can still be listed as the primary beneficiary, and the accounts will count 0% against your family’s expected contribution. However, this will depend upon your trust of your parents and relationship with them. The worst case for expected family contribution(as other posters have stated) is to transfer it into their name. This way your children will qualify for the most financial aid possible.

  14. Trent Hamm Trent says:

    I’m going custodial because I want this money to be my child’s money no matter what choices he or she makes. If my child starts their own business right out of high school and does that with his/her life, then I want that money to become wholly theirs to do with what they wish at age 21. If he/she wants to invest it in their business, they can. If he/she wants to just hold onto it for their own children or for potential future education, they can.

    I view it as a mutual fund for my children that has tax benefits if they choose to use it for educational purposes – I have no interest in any control over the money once they reach 21. Will they use it responsibly? I guess that will be one serious test of how well I raised them.

  15. Well since I’m not even close to pregnant, not even trying to have kids, I think I may be a bit to overboard. I’ve got $2k in a 529 college fund for myself right now (waiting for my kid). I think we’re trying in 2-3 years and by then I want $10k in there.

    So yes I’m bitten hard by the desire for a baby.

  16. !wanda says:

    “I’m going custodial because I want this money to be my child’s money no matter what choices he or she makes.”

    It can still be “your child’s money,” regardless of whose name is on it. If you can get her financial aid benefits by putting it in your name, why not? Make an agreement with your whole family and stick to it. Are you afraid that you won’t be able to give them that money without judgment, or that your kids won’t believe you when you say the money is theirs?

    Another route would be to see what the tax laws, financial aid applications, and your kids are like when they turn 12 or so. Then you can adjust which name is on the fund accordingly.

  17. MVP says:

    Personally, I don’t feel this is necessary. For those of us who are on a budget and refuse to go into debt, I think it’s wise to put aside as much cash as possible during pregnancy, just in case of an emergency (sorry, but miscarriages and labor and delivery problems do happen and can cost you thousands out-of-pocket, even with insurance). I’d prefer to set aside money for that. Then, once the child is born and everyone’s healthy, that money can go into the college fund. I’m also not sure about putting the fund in her name. It’s interesting that you (Trent) are willing to bank on the fact that you raised your child to make the right decisions, but we’ve all been 18 and we know many young people, regardless of how they were raised, simply don’t have the maturity to handle large sums of money wisely. I definitely don’t agree with handing an 18-year-old $60K if they’re not planning to use it for college expenses or something else worthwhile. Personally, I’m not willing to bet my kid won’t someday get into drinking/drugs/etc. and decide to blow that hard-earned money – it happens, and you could end up contributing to an already-bad situation. I also wouldn’t go into major debt to fund your child’s college education. If it comes to that, they can get their own loans, or do as many manage to do and work through college, which is a valuable experience. To Derek, Mardee and !wanda, why is it important to consider the possibility of financial aid in this discussion? Isn’t the whole point to avoid that? Not to mention, Derek, I’m not sure your suggestion of essentially hiding the money is ethical or moral, let alone legal.

  18. Mitch says:

    MVP, even his $60,000 may not pay for a four year degree. I expect the epsilons will get some merit aid, and have some of their own savings, but tuition and fees have been rising faster than inflation so they may still qualify for some small grants. I figure that unless you give up your SSN it’s always worth filling out the FAFSA even if you’re not taking out loans. Most of it is straight off your tax forms.

  19. MossySF says:

    The custodial argument is moot. As of 2006, custodial 529s are considered parent assets.


  20. Kristina says:

    Hiding money from the government so that you can appear to more more poor than you are to get more benefits is illegal. It’s called fraud. Government aid for college is for people who can’t otherwise afford it. If a child is lucky enough to have parents who were able to save money, they are not poor and this money should be taken into account when figuring out how much they are due in federal grants and loans.

    Try having integrity – do not hide your kid’s money in the name of another relative.

  21. plonkee says:

    Saving money in your name rather than the kids name isn’t illegal since you are saving the money in the first place. It would be fraud if the kids earned the money and gave it to you to hide.

    Perhaps the best option (if its possible) would be to keep the money in your name until the kid is deciding whether to go to college or not. Then if they want to go and it will help their financial aid you could leave it in your name. If they don’t, or it will have no impact on financial aid stick it in theirs.

  22. kim says:

    I can’t see how Derek’s suggestion is immoral or fraud. A parent is saving a parent’s money. Dereck is simply stating that keeping it in the parent’s name instead of gifting it earlier to the child makes more sense from a financial aid stand point. When determining financial aid, the government figures that a child can contribute a far greater percentage of his or her assets per year than a parent can. Therefore, keeping Trent’s money in Trent’s name makes far more sense if they will be in a position to receive financial aid. Nothing illegal or immoral there.

    Trent, I agree with MVP about giving full access to a large sum of money to a 21 year old. I know what I would have done with that kind of money at that age. Remember your life before financial armageddeon. Kids have to make mistakes. I did, you did, anyone on a good financial path could probably describe their own learning mistakes. Do you really want to fuel their armageddeon? I know you will raise them right, but kids rebel. There is an age where many kids think their parents have the world all wrong. Are you willing to risk your child blowing the money at 21 on a sports car and then the next year deciding that and education makes sense after all. Would you be willing to foot the bill after they blew the savings? Would you be resentful? Would it cause and uncomfortable rift between you and your child? I know you cited examples such as starting a business. However, if you don’t put restrictions on the money, are you OK with the very real possibility that a child with very little real world experience could blow years of your savings on something trivial?

    Don’t get me wrong, I love everything else about your plan. Just not the unrestricted access at 21. At least wait until your children are much, much older before making such a decision! If you are going to do it at least make it 30.

  23. Gayle says:

    Trent, if the age of majority is 18, as it is in my state, can you delay the transfer of control until they are 21? Best check that out. The difference in maturity between 18 and 21 is quite a bit.

  24. Sarah says:

    MVP– regarding the comment about why should financial aid matter that you asked Derek, Mardee and Wanda (though I’m not any of them, but I graduated with my BA in ’05 and I’m now in grad school): college costs right now are well over $40,000 or even $60,000 for four years (ten thousand for each year will cover tuition at state schools, let alone other costs and/or private institutions). I’m sure they’ll cost much more in 2025. Usually, students are encouraged to apply for financial aid even if they don’t need it, in case (a) they do end up needing it when they thought they wouldn’t, which is what happened to me, or (b) it’s the only way to be eligible for scholarships and grants, even merit-based ones.

    If you throw unfunded grad school in there (which is the case in some fields where there just isn’t the money, i.e. vet school), you’re looking at possibly $100,000 in school bills for grad school alone. Is it worth it? I dunno, I’m not in vet school:)

  25. Nick says:

    Nice work getting started early on your child’s future. I’m sure it won’t be an issue for your kids, they will have a sound financial education, but just remember that kids who have too much handed to them never learn to properly manage their money. Paying your own way through college (partially or wholely) can really make someone learn about proper financial responsibilities.

    Then again, my parents made me pay my own way, and it didn’t do me much good. I’m still paying for it now!

  26. David says:

    If I understand 529 plans correctly, they can only ever be used for education. This means that you really shouldn’t view them as mutual funds for your kids. Your kids won’t be able to use the money to fund a business or for any other endeavor than education.

  27. MK says:

    My parents required that we pay for half of college – we knew this in advance. Guess what – we both made good grades and got scholarships – because we didn’t want to go into debt (they also made us take our FHA youth loans, so we both hate debt – another story). My parents paid for books and some incidentals (gas to come home) – I paid for everything else. I saved and worked and when I went to graduate school, I came out with only $8500 in debt from a well-regarded private school. My husband,whose parents paid for college, bought him a townhouse to live in and financed his living expenses in college, proceeded to rack up $35K for the same program. I think my money management is a DIRECT result of my parents making it clear that college was something to be earned and appreciated – not something given to me. I don’t want to pay for my kids to go to college for the same reason.

  28. Rick says:

    529s can only be used *tax-free* for education. You can withdraw from them with a 10% penalty for other purposes. In that respect, 529s are like an IRA, but for education, rather than retirement.

    Trent, I side with those arguing you should keep the money in your name, rather than the kids. I don’t remember the exact percentages, but assets in the child’s name count much more towards the “Expected Family Contribution” than assets in the parent’s name. I would call up the financial aid advisor at your local university and ask for advice, since this one little step *could* end up costing your kid thousands in tuition money he could otherwise get financial aid for. You could still give it to your kid to start a business if that’s his plan instead.

    I can say this: your kids are lucky you’re willing to pay for their college education. Mine didn’t. I had to pay it all myself. In some ways, though, I feel I turned out better. Since it was *my* money, I felt inclined to put it to the best use and study hard and learn, rather than just partying away.

  29. Dr J says:

    Excellent topic. I’m expecting my first son in a little over 4 weeks now and I’ve been wondering a good way to start saving now for his future.

  30. MVP says:

    Kim, just to clarify, I addressed Derek, in particular, because he suggested putting the money in the child’s GRANDPARENTS’ names, not the parents’. That sounds pretty deceptive to me. Sarah, you’re right, and I admit I’m a little naive in this area – I was fortunate to get a top-notch education (graduated in 2000) at a highly regarded state school on good scholarships, only needing a few thousand in student loans for equipment necessary for my degree. I just want to make the point that many of us want to start saving early so our children don’t need to take out student loans. Good comments, MK and Rick. Also, my husband and I don’t plan to share with our children the amount we’ll have saved for their education. It won’t technically be their money until they need it for purposes we think are good for their futures. And, we want them to choose a school and education plan wisely, not on the basis of “I have $x, I think I’ll go to an out-of-state Ivy League school because I can afford it.”

  31. Brian says:

    Yet another excellent post. I agree with some of the others as to where you are going to keep the money. The tax advantages of the 529’s are enormous and even after the penalities, they would come out ahead if they chose not to use it for college. By NOT sheltering that money, you will severely restrict their financial aid eligibility(and their is NOTHING wrong with applying for financial aid). The 529’s are one way the government has tried to correct the imbalance of penalizing parents who do save for their children’s college education, as opposed to those that don’t.

    If you are adamant about giving them some money, you could always put part of it in the custodial account(say the gifts) and the rest in the 529. That way they enjoy both the tax advantage and still get some money.

    Kudos to you for your planning ahead and posting such thought provoking points. Thanks

  32. MossySF says:

    It’s interesting how people continually post that custodial 529s will impact financial aid when the link I posted above (will repost again) clearly state is totally untrue.


    In fact, if you actually read the article, you will find that Congress made a mistake and custodial 529s are not counted as either parental or child assets! For the moment (until Congress fixes this oversight), custodial 529s are MORE sheltered for the purpose of getting financial aid.

  33. Kristi says:

    A 529 is the best option because you can lock in today’s tuition cost. (At least I think this is the kind that does that… if not, then it’s worth researching which one does). It’s kind of like the prepaid funeral plans. People think they’re silly, but they do save lots of money. Say if you were to die today, your funeral will cost $6,000. You pick out the casket, headstone, make music arrangements – everything. That $6,000 price is locked in. Actually, you have ALREADY paid for your funeral. The company takes your money, invests it and then when you actually die, they pay for it even if it costs $12,000 by the time you die. Locking in today’s prices for tomorrow is a great thing whether it’s for a funeral or for tuition or something else. The costs are not going to go down. By the way, I don’t mean to seem sinister or anything. I know some people don’t like to think about their death, but to me a prepaid funeral plan makes just as much sense as making a will. You’re securing your family’s future. No one has to plan your funeral while grieving at the same time and no one has a cent to pay for the funeral either. They can then use your life insurance policy for something else.

    Trent, what do you think of prepaid funeral plans? Do you have one?

  34. !wanda says:

    “A 529 is the best option because you can lock in today’s tuition cost.”

    529s don’t do that. The plans that do force you to go to your state school. My parents have the opposite bias (insisted I go to a private school for college), but the state school may not be the best one for your kid.

  35. Bill says:

    Nothing prevents a school from going beyond the standard federal form and asking about parent-owned (custodal or not) or grandparent-owned custodial accounts (e.g 529 plans)

    Some schools are even looking at the amount of equity available in the parents’ home, and factor that into the financial aid equation.

    Even if the parents NEVER intended to take a equity loan to pay for their kids’ college expenses!

    All the more reason for parents to max out their 401K and IRA accounts (Roth or not) – those are about the only assets a school can’t consider in making the financial aid calculation.

    >custodial 529s are not counted as either parental or child assets!

  36. Mardee says:

    “For the moment (until Congress fixes this oversight), custodial 529s are MORE sheltered for the purpose of getting financial aid.”

    @Mossy: The key words there are “for the moment.” Every financial analyst out there is sure that Congress is going to change this so that the shelter goes away. It might help a student in college for the next year or so, but the current loophole is not going to help a toddler.

    I still think that Trent should think seriously about this. At this time, parents only need to contribute 5.6% to college – students, on the other hand, must contribute 20% (and it used to be 35%). If it were my child, and it was time for her to go to college, I would hope that most of the assets were in my name so my child doesn’t have to wipe out her savings to go to college.

  37. MossySF says:

    So you don’t think Congress doesn’t know the lack of difference between parent and children 529s. Gimme a break. Guarantee you if they hit one, they’ll hit the other.

  38. Brian says:

    529’s are college savings plans with tax sheltered/free growth AND they can be either pre-paid tuition plans OR investment plans.

    When first enacted, there was concern that these plans would count against financial aid, but clarification was made to ensure that they currently don’t.

    At this point, think of 529’s like Roth IRAs, they are a wonderful tool due to the tax advantages. Just because I know Congress may eventually want to change/decrease the tax advantages of both plans, it doesn’t stop me from using either of them. In fact, the opposite is true. Better to get into them now before they change them and hope there are enough people using these vehicles to either prompt Congress to not take any action or grandfather existing plans.

  39. What’s wrong with saving early for college? It’s not a lot and I don’t have a ton else to save for. I could save for a fancy new car, but DH won’t do it. I do all our retirement, an other savings options. So what’s left? Well we could be stashing away more money but it seems sort of nice to think about having a college fund already started for your little one before you even start trying.

  40. Kyle says:

    The Pension Protection Act of 2006 made permanent the changes to Section 529 of the federal tax code made by the 2001 Economic Growth and Tax Relief Reconciliation Act, including investors’ ability to withdraw earnings from 529 plans, free of federal taxes, for qualified college expenses. Until passage of the law, federal tax breaks on 529 plan earnings were set to expire at the end of 2010. Now there’s no “closing loophole” to worry about.

  41. I think that investing in education in whatever shape or form is an absolute must, the initial sacrifice made will pay off in many ways some which you may not even have thought about long into adult life. I for one have done everything to guarantee that my children have the best possible start in life and the very best possible education from birth onwards.

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