My wife and I recently found out we're expecting our first child in September. Quite a surprise to say the least!

I'm 37, my wife is 32. We're in a good overall financial situation. Both have steady-ish high paying jobs in Tech. I've been a diligent saver and investor. Maxing out retirement accounts for the last 10-15 years. Committed to continuing.

We have two rental properties that cash flow monthly. No debt outside of primary residence and a small low rate car loan we run through our real estate investment LLC.

Looking for advice and articles around things like 529s, etc.

We're also working on updating our estate planning approach in terms of Will, Term Life, Umbrella Policies so welcome opinion there as well.

Happy to provide any other information

What tax advantage does a 529 offer?

Ah, gotcha. I thought you meant a tax advantage for the contribution itself

Depending on income level, you might want to use 529 for room and board and part of tuition and pay for tuition out of pocket and pay at least $4,000 of tuition out of pocket if income is low enough to qualify for American Opportunity tax credit and it is still around. Also 529 funds up to $35,000 can be used for ROTH IRA contributions provided certain guidelines are met which is a pretty nice recent benefit.

Put money for them anywhere but a UTMA.
Sometimes your kids don't turn out like you'd expect. To prevent surprises you can simply set aside however much $ you want to in a separate joint account, you and your wife. Make the kid a Payable on Death beneficiary (that will require a trust to be set up if they're a minor when you die but that's simple) in case you both go unexpectedly. Then when it's college time just sell periodically to cover expenses. If kiddo turns out to become a bum then no problem, you've contributed to your retirement plan.
UTMA's get complicated when kid turns 18 or 21 (depending on residency) and wants the money for him/her self. 529's have ongoing tax advantages but that gets lost if kiddo skips college. And if you start now and contribute regularly in 18 years you might be talking serious money that you don't have a choice as to how to use it.
Use the stock market, I can't remember any 18 year stock market losing money, a website I found says the worst 20 year market on record was 1929-49 with a return average of 2% a year.

OldArmyCT said:

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Put money for them anywhere but a UTMA.
Sometimes your kids don't turn out like you'd expect. To prevent surprises you can simply set aside however much $ you want to in a separate joint account, you and your wife. Make the kid a Payable on Death beneficiary (that will require a trust to be set up if they're a minor when you die but that's simple) in case you both go unexpectedly. Then when it's college time just sell periodically to cover expenses. If kiddo turns out to become a bum then no problem, you've contributed to your retirement plan.
UTMA's get complicated when kid turns 18 or 21 (depending on residency) and wants the money for him/her self. 529's have ongoing tax advantages but that gets lost if kiddo skips college. And if you start now and contribute regularly in 18 years you might be talking serious money that you don't have a choice as to how to use it.
Use the stock market, I can't remember any 18 year stock market losing money, a website I found says the worst 20 year market on record was 1929-49 with a return average of 2% a year.

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You can make similar investments for that 2% inside of your 529 plan.

If the kid doesn't end up using it, then you'll pay the same taxes + 10%.

So the math would be comparing your tax savings to the likelihood of it not being used for education and you taking the 10% penalty -- the actual investment return will be comparable.

DonaldFDraper said:

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My wife...

Happy to provide any other information

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Well since you offer, Rule #1 bruh.

You seem to have all the ducks in a row so I will follow this to see if I catch anything useful also. My humble additions:

1) You can start a Roth IRA for the kid as soon as they have enough earned income. You have an LLC for real estate that you put your car on so maybe you could find a way to do this legit also. I don't do this but some do.

2) 529 state matters, pick a good one. Not sure it matters THAT much but hey, that's what they say.

3) Insurance for kid, enough to cover funeral expense or something should he/she pass young.

4) Are y'all already doing backdoor Roth and Mega backdoor Roth? There are some advantages in inheritance and RMDs to look into. HSA too.

5) Buy a bottle of whiskey or Rolex of their birth year to give them when they turn 18. Also did not do this with mine but would be cool.

billydean05 said:

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Depending on income level, you might want to use 529 for room and board and part of tuition and pay for tuition out of pocket and pay at least $4,000 of tuition out of pocket if income is low enough to qualify for American Opportunity tax credit and it is still around. Also 529 funds up to $35,000 can be used for ROTH IRA contributions provided certain guidelines are met which is a pretty nice recent benefit.

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Thanks! I'll look into to 529 > Roth IRA.

Proposition Joe said:

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OldArmyCT said:

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Put money for them anywhere but a UTMA.
Sometimes your kids don't turn out like you'd expect. To prevent surprises you can simply set aside however much $ you want to in a separate joint account, you and your wife. Make the kid a Payable on Death beneficiary (that will require a trust to be set up if they're a minor when you die but that's simple) in case you both go unexpectedly. Then when it's college time just sell periodically to cover expenses. If kiddo turns out to become a bum then no problem, you've contributed to your retirement plan.
UTMA's get complicated when kid turns 18 or 21 (depending on residency) and wants the money for him/her self. 529's have ongoing tax advantages but that gets lost if kiddo skips college. And if you start now and contribute regularly in 18 years you might be talking serious money that you don't have a choice as to how to use it.
Use the stock market, I can't remember any 18 year stock market losing money, a website I found says the worst 20 year market on record was 1929-49 with a return average of 2% a year.

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You can make similar investments for that 2% inside of your 529 plan.

If the kid doesn't end up using it, then you'll pay the same taxes + 10%.

So the math would be comparing your tax savings to the likelihood of it not being used for education and you taking the 10% penalty -- the actual investment return will be comparable.

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Fair points on both sides. I want the benefit of investing in the market - non negotiable. Tax advantages are nice but are secondary to the investment opportunities.

There is going to be far more variability in the next ~20 years of child rearing than the returns of the market imo.

My goal for today is to educate myself on the options available and take advantage of the ones that will benefit from the time factor. Set it and forget it style.

I want to provide a foundation for the child to build from, but don't intend to hand them a life where everything is taken care of. Even if we could.

I have my own life and financial ambitions that I'm adjusting but not abandoning. Flexibility is an important factor so don't intend to put all the eggs in one basket.

My current plan is to attempt to calculate an initial equilibrium of Tax Advantages vs. Flexibility then tweak along the way

Appreciate all the responses! Keep em coming

DonaldFDraper said:

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billydean05 said:

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Depending on income level, you might want to use 529 for room and board and part of tuition and pay for tuition out of pocket and pay at least $4,000 of tuition out of pocket if income is low enough to qualify for American Opportunity tax credit and it is still around. Also 529 funds up to $35,000 can be used for ROTH IRA contributions provided certain guidelines are met which is a pretty nice recent benefit.

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Thanks! I'll look into to 529 > Roth IRA.

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One thing on the 529 to Roth conversion that most people don't seem to consider is that the beneficiary is subject to the annual contribution limits and likely requires earned income (unclear - see link below). So in order to convert the full $35,000, it would take 5 years at the current contribution limits ($7,000) and the beneficiary also wouldn't be able to contribute to a Roth IRA during those years. Some opportunity costs to think about with that. Presumably, the conversion happens the first few years after college when the beneficiary's earned income is the lowest and would most benefit from contributing their own assets into a Roth.

The conversion to a Roth IRA is a nice perk, but I probably wouldn't overfund a 529 with the expectation of making the conversion.

Fidelity: How unused 529 assets can help with retirement planning

What are the board's thoughts on best state plan for those of us that live in Texas and don't have to worry about state taxes? Is Utah still considered to be one of the best?

Dale Earnhardts Stache said:

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What are the board's thoughts on best state plan for those of us that live in Texas and don't have to worry about state taxes? Is Utah still considered to be one of the best?

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Most state 529 plans have improved over the past 5-10 years so the quality gap between the best and others is much smaller than it used to be. Utah's is still among (and probably is) the best and seems committed to staying near the top.

Morningstar 529 Ratings: The Best Plans of 2024