For 1-year-old birthdays, Koreans lay out objects that represent different careers in front of the child. Our daughter had a coin pouch, baseball, wrench, brush, computer mouse, and stethoscope in front of her. After flirting with the baseball, she, to my dismay, did not choose the wrench.
If the superstition becomes true, then my wife and I will need to find ways to pay for college. Like many new parents, we thought about starting a “college fund” during my residency training. We live in a state where contributing to a 529 plan would not reduce our state income tax. It gives us the freedom to “shop around” for out-of-state 529 plans if we want to take advantage of a 529’s other benefits, such as tax-free growth. But even if we lived in a state where we could claim a deduction for 529 contributions, our way-too-early plan for my daughter’s college fund might not start with a 529.
We are saving for our daughter (or any number of children, for that matter) in the following order.
#1 Our Own Retirement Accounts
We save for ourselves first so that our daughter will not have to support us when we get to retirement age. We max out our Roth IRAs and Health Savings Account and contribute more than what is required for the employer match to our 401(k) and 403(b) plans. We would consider contributing to our daughter’s college fund only after we hit our savings goal, which is higher than 20% of gross income.
Our approach contrasts with many Asian parents (such as our own) who have prioritized their children’s education over their own financial well-being. Perhaps they banked on their child’s academic success to fund their retirement. But math is math. The reality of compounding is that the more we focus on our retirement savings now, the more we can financially support her education or vocation in her 20s.
#2 Taxable Account
We have a monthly net income of about $1,000 as landlords because of economic outpatient care, and we made an “against WCI advice” decision to buy an apartment during medical school. We now frame the rental income as a combination of early inheritance and grandparents’ gift. If we contribute $1,000 monthly to our child’s 529 plan until she turns 18, we can expect to have $349,200 with 5% annual real return.
Instead of contributing to a 529 plan from the very beginning, what if we do the following in 2025 dollars?
- Buy $12,000 of VTI every year for 13 years in our taxable account and then stop.
- In year 13, “superfund” a 529 plan with five years of contributions ($60,000).
Here are our assumptions:
- Our child starts college in year 18.
- Annual real return is 5%.
- VTI has a constant dividend rate of 1.2%, and 91% of dividends are qualified.
- I pay capital gains tax and NIIT and use the lowest 529 fee available.
By year 18, we would have in 2025 dollars:
- Taxable account = $277,000
- 529 account = $76,200
- Total savings = $353,200
This scenario illustrates how our college fund can be tax-efficient and liquid. While I am a resident, access to liquid assets is more valuable than tax-free growth because we might need to buy a second car, move to a bigger rental, or—gasp—save for a down payment. As an attending, using our cash flow for large one-time expenses should be less of an issue, but the taxable account would give us optionality.
Here are the possibilities:
- Instead of paying capital gains tax, we can donate appreciated shares to a Donor Advised Fund and replace our charitable giving (in cash) with a contribution to a 529 plan. This way, we can even contribute up to five years of contributions (or more if we do not mind reducing the lifetime exemption) in one year.
- We can use it for our own financial independence.
- We can give it to our daughter as an early inheritance.
More information here:
College Costs What You’re Willing to Pay
How Much Should You Sacrifice to Pay for Your Child’s Medical School Education?
#3 UGMA/UTMA Account
My wife, daughter, and I may not have a good sense of whether college would be a worthwhile or timely investment for her at age 18. She may be brilliant but lack the work ethic. Or she may want to explore different vocations before deciding on college. Moreover, the current trends in the job market for college grads may be a harbinger of how artificial intelligence will transform higher education and white-collar jobs. (My daughter choosing the computer mouse for her first birthday may be a bad omen.)
I want my daughter to have the flexibility to say “no” or “not yet” to college. For the same reasons that Dr. Jim Dahle has a “20’s fund” for his children, I would open a UGMA or UTMA account so that she will have reasonable financial security regardless of the path that she chooses. If she goes to college, she can use the UGMA/UTMA account for discretionary expenses, because my wife and I will still pay for college using our taxable account or cash flow. If she does not, she can use the UGMA/UTMA account to fund her business or pursuits that do not generate income immediately (e.g., art, music). But we would not want her to have so much money in the UGMA/UTMA account that she can go through her 20s without working. Based on my own 20s, I think $30,000 in 2025 dollars would be a reasonable amount: enough to cover living expenses for a year or buy a new or certified pre-owned sedan.
#4 Roth IRA
If our daughter ever works as a teenager, we will contribute to her Roth IRA. My wife and I will have to work out the details of the “parent match” as it will be a part of her financial education. But even if she does not want the match, we would not want her to miss out on the opportunity to invest as early as possible because of the power of compounding.
#5 529 Plan
Whether we contribute to a 529 plan would depend on the size of our retirement, taxable, and UGMA/UTMA accounts. If we feel comfortable about our future sources of income and current liquidity, then we will “lock up” our money for something that may or may not happen. I imagine that we would follow the aforementioned scenario and superfund our daughter’s 529 plan. At the very least, we can roll over her 529 to her Roth IRA if she has an overfunded 529 or change the beneficiary to another child.
More information here:
How Our Plan to Start a Family Affects Our Quest for Financial Independence
Partner-Centered Personal Finance
‘You Don't Have to Do It All, and You Don't Have to Do It All in Advance'
The quote above underscores the challenge of predicting how much we need to save for our child’s college. Your plan is going to differ from mine, because we are going to value financial security and education differently. But trying to do it all in advance can feel overwhelming, and it risks oversaving. As long as we are mindful about how we save for our child’s future, the source or even the size of their college fund may not matter.
How did you save for college for your children? Did you front-load it and let compounding do its job, or did you wait until later in the process? Or did you cash flow it? What's the best solution for this issue?