Why I won't be opening a 529 plan for my son's college costs

I want to set aside money for my child for post-secondary education expenses, but my husband and I didn't want to assume he'll go to college.

I'm Canadian, so there could be a chance my son will go to college there, meaning the 529 plan wouldn't get the tax advantages that make it so appealing.

Instead, we opted to save money in a high-yield savings account and a Roth IRA to fund his future plans, whatever they may be.

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We all want our children to have the best opportunities in life — I know I certainly do.

Aside from providing them with the basic necessities, I want to ensure that my son doesn't have to worry about the stress of paying for college.

Considering student loan debt climbed to more than $1.4 trillion, with the average amount per borrower was $34,144 in 2017, I'm naturally a bit concerned, especially since my son still has at least 10 years before we even have to worry about college applications.

In other words, who knows how much college will cost by that point. I certainly don't want to take out a large loan nor do I want him to, if we can help it.

For many parents, a 529 plan seems like a logical way to go when saving for their child's education. After all, they're tax-advantaged accounts — your contributions don't count as part of your taxable income, your earnings grow tax-free, and if you withdraw money for qualified education expenses, you're not subject to federal taxes (in most cases, state taxes as well).

However, I'm not one of those parents. That's not to say I don't care about saving money on taxes or that I don't want to contribute to my son's college fund. Quite the opposite.

I'll be saving for my son's education, but I won't be using a 529. Here are my reasons why.

We can't predict the future

The truth is, 10-plus years is a long time and we never know what will happen. I don't exactly live by YOLO (you only live once) philosophy, but I'm realistic in that things change between now and then. As in, even if my son expresses an interest in college when he's in middle or high school, doesn't mean that's what he'll end up doing by the time he's turning 18.

I also don't want to assume that's his path because, frankly, he's his own person and is entitled to do what he wants with his life. That means if he wants to become a plumber and train by apprenticing with an experienced professional, that's fine with me.

In this case, a 529 plan doesn't make sense — you'll face tax penalties in addition to federal (and possibly state) taxes if you use the money for nonqualified expenses. While I know what counts as qualified expenses can vary wildly, who knows if that will change or what my son wants to do when he's older will fall under what's considered qualified.

It makes more sense for us to invest money in other ways that allows us to grow our money while maintaining flexibility in how that money can be used.

We could be living in another country

My husband and I have been nomadic for as we can remember — we've lived overseas for a number of years and traveled to a dozen more countries. Even my son was born in China!

To make matters more complicated, I'm Canadian. As in, we could end up living there in the foreseeable future. Even if we don't, my son still has the opportunity to go to school there if he chooses, because of my citizenship.

What this means is that if he does, then the 529 is essentially useless from a tax advantaged perspective. While funds from a 529 can be used at any institution that qualifies for Title IV federal student aid (including many in Canada), we probably won't be paying taxes in the US if we're not living there. My son is lucky he has a bunch of options for post-secondary education, so we want to make sure that our savings can go towards that.

We opted for a more flexible option

Like I mentioned before, we're still putting money for my son for when he's older. Instead of opting for a 529 plan, we're doing a combination of a high-interest savings account and a Roth IRA (in my name, not his). The savings account is for when friends and family want to contribute money and for him to start learning how to manage money when he's a little bit older.

The Roth IRA works as an investment vehicle because we believe it's more flexible for our needs. Since we can withdraw contributions without a penalty, we can opt to do that if our son needs money once he reaches 18. Otherwise, if he does decide to go to college, we can also withdraw money tax-free from our Roth IRA as long as it counts as a qualified education expense.

A 529 isn't for everyone

There are a lot of benefits to a 529 plan — tax deferred earnings, tax free withdrawals for qualified educational expenses and money set aside for your child for their education — but it's not for everyone. After weighing the pros and cons, we decided that the risk of needing to pay taxes plus a possible penalty down the line wasn't worth the risk. But if you and your family decide that a 529 plan makes sense, do your research and good luck!

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