The Ultimate Gift: Why a 529 Plan is the Best Present for Your Newborn

Brennan McCarthy, CFP®

My family and I were blessed to have been able to celebrate the arrival of our 3rd child, Hollie Gabriella McCarthy, to our family on November 24th, 2023. We’ve learned from experience that the “newborn phase” is a mentally foggy time where the goal is simple: survive. Attempting to get a handful of 5-minute power naps in throughout the day between the diaper changes, spit-up, and toddler tantrums is the only path to sanity.

As sleep has started to become more consistent and the mental fog starts to clear up a little, we agreed to do the same for Hollie that we did for our first two children (see the 3 kiddos below): open and fund a 529 account.

Believe it or not, opening and funding a 529 plan for your newborn might be the best financial decision you can make for their financial well-being over the long run. Here's why:

The Power of Time: Supercharge Your Savings with Compound Interest

Imagine this: you invest $50 each month, or $600/year in a 529 plan for 18 years. With an average annual return of 7%, that tiny sum turns into almost $22,000 by the time your child reaches college age! That's the magic of compound interest – your money grows exponentially over time, giving your child a significant head start on higher education costs. Over that 18 year time span, you would have put in a grand total of $10,800 to end up wihth $22,000 by age 18.

With that said, let's pretend that you're fortunate enough to pile together (either from grandparents, family members, or friends) a starting fund of $5,000, AND continue to save $50/month. In this case, that value would baloon to closer to $40,000 just 18 years later!.

Tax-Free Growth: Cut the Government out of the Deal

529 plans offer a sweet tax benefit: contributions and earnings grow tax-free if they are withdrawn for qualified education expenses. That means you get to keep more of your hard-earned money, allowing it to stretch further and cover more tuition, fees, books, and even on-campus housing. It's like a double bonus – you save more, and your child reaps the rewards.

More than just College: A Flexible Fund for the Future

Think 529 plans are just for college? Think again! These versatile accounts can now be used for a wider range of education expenses, including:

Private K-12 tuition
Trade schools and apprenticeships
Vocational training programs
Student loan repayments

This flexibility ensures that your investment supports your child's unique educational path, no matter which direction they choose.

On top of that, there is a new exciting law that was enacted and begins in 2024 that allows account beneficiaries to roll unused funds from a 529 into a Roth IRA in their own name. For those parents afraid that college will become free by the time their child needs to go to college, or that their child will opt out of college altogether, this new added feature to the SECURE Act 2.0 opens the book for an incredible savings opportunity. While there are a handful of rules surrounding how to make these rollover eligible, it pushes aside many of those prior concerns.

If your child still isn't able to roll over the full remaining balance, they can eventually transfer it to their own child down in the future, so the funds will never be lost.

4. Start Small, Dream Big: Every Contribution Counts

Don't let the fear of big numbers hold you back. You can start a 529 plan with as little as $25 and gradually increase your contributions as your budget allows. Remember, consistency is key – even small, regular contributions can make a significant difference over time.

Investing in a 529 plan isn't just about saving money; it's about investing in your child's future, their dreams, and their potential. It's a gift that will resonate throughout their lives, opening doors to educational opportunities and empowering them to chase their ambitions. So, give your newborn the ultimate gift – the gift of a brighter future, fueled by the power of a 529 plan.

Remember, it's never too early to start planning. Talk to your financial advisor today and get your child's 529 journey started!

Additional Tips:

Consider setting up automatic contributions to make saving effortless.
Enlist the help of family and friends – they can contribute to your child's 529 plan as gifts or donations.
Most importantly, start early and stay consistent. The power of compound interest will work its magic over time, and your child will thank you for it later.

Let's give our children the gift of education, the gift of opportunity, and the gift of a brighter tomorrow. Start a 529 plan today!

The benefits of opening a 529 plan for your newborn are immense, and some new updates to the tax code have made it even more appealing. Remember, it's never too late to start investing in their future. Give them the gift of education, the gift of opportunity, and the gift of a brighter tomorrow.

Let me know your thoughts!