What if My Kid Doesn’t Go to College?
As parents, one of our greatest responsibilities is preparing for our children's future, which often includes saving money. When I was growing up, college was the assumptive path for a life of success and while that is still largely the case, we are all aware that the college landscape is changing. Soaring costs and lower perceived value may change how our kids look at it over the next 10-20 years. However, as societal and economic landscapes evolve, so do our perspectives on what constitutes a secure future for our kids.
As it stands, “college savings” are synonymous with the 529 plan—a tax-advantaged investment vehicle designed specifically for education expenses. Similar to retirement accounts like 401(k)s and IRAs, 529 plans offer tax-free growth, making them an attractive option for many families. Contributions may even qualify for state tax deductions, adding to their appeal. This makes them the best option if you KNOW your kids will go to college.
But…..what if your kid doesn’t go to college?
What if their ambitions lead them elsewhere—to entrepreneurship, vocational training, or a career in fields we currently don’t know will exist in the future (did anyone predict “AI Prompt Engineer” as a career 20 years ago)?
The flexibility of 529 plans has improved with recent legislative changes, but they still come with penalties if funds are used for non-educational purposes. Withdrawals not used for qualified educational expenses incur income tax plus a 10% penalty.
Here are some options to consider:
If your child goes to college on a full-ride scholarship, you won’t be hit with a penalty, but you will still have to pay income tax on it
You can always change the beneficiary if for example, one kid goes to college and the other doesn’t. But then only 1 kid benefits…
Some new rules allow some portions of the account to be transferred to a Roth IRA for the kid, but there are a lot of specific things that have to take place and the lifetime limit of the money is relatively low right now ($35k).
You could also use the money for private K-12 tuition, but that isn’t for everyone.
Considering these factors, we encourage some parents to diversify their savings strategy beyond 529 plans—utilizing a standard investment account, known as a taxable brokerage account. You can still earmark it for your child’s future benefit and even use it all to help pay for college if they end up going.
What you lose in tax breaks, you make up for with flexibility. The nice thing is you will be in a capital gains tax rate, which tends to be lower than income tax brackets.
If you KNEW what path your child was going to take, we wouldn’t have to guess, so allocating some money to a general investing account for their benefit might make sense. As they get older and you get to know them a little better, you can get a better sense of what their future might hold and what the environment looks like at that time.
Last reminder—make sure you are taking care of your own financial future before you start thinking about saving for your kids. You don’t want to neglect your own savings to help your kids, only to have to be reliant on them down the road. Don’t let what you intend as a gift end up costing your kids much more—unintentionally reversing the roles.
