529 vs. ESA

[~Ari~]

I'm sure this question has been asked, so if someone could lead me in the right directions that would be wonderful!!

If not, here's my question.

What is more beneficial to both our children and ourselves as far as investing for our children's educations - a ESA or a 529? Right now, we have 1 year old and plan to have at least 1 or 2 more children in the future. We want to be able to help them out financially for their future education - but we decided that we are not going to fully fund their college educations. We will be there to help them when and if they need, but only plan to give them a good start of 10-20K per a child. Thanks for the help!

[Cognitive Miser]

I'm struggling with this as well.  We definitely don't want to pressure our kids to go to a four-year university, when the cost/benefit of that sort of education has been declining.  There's a little bit of guidance in the Bogleheads investing book - right now I'm leaning toward withdrawing from my Roth for this purpose.  My parents have set up a 529 but they say it's just "pocket change".  Each kid can have more than one 529.  With an ESA, you have to be more careful about blowing annual contribution limits (like the limits on total contribution to both a Roth and a Traditional IRA... everyone who wants to put money in an ESA for your kid has to meet a cumulative maximum).

I'd be interested in hearing others' thoughts!

[CanuckExpat]

What state do you live in, is there a deduction for 529 contribution? What is your income?
That would help decide the tax implications. Also, if your income is too high, you can't contribute to an ESA, so that would make it easy to rule out :)

Does ultimate control of the account matter to you? We made a lump-sum 529 contribution around the time of our son's birth. Because of the way 529s are "owned" it still belongs to us even though he is the beneficiary. If shit really hit the fan, we'd have the option of raiding the 529 for any purposes, and paying the tax penalty. (shit would really have to hit the fan for this to happen). From what I understand, an ESA might "belong" more to the beneficiary.

Thinking back though, without a state tax deduction, I am not sure a 529 was that helpful to us.

[Undecided]

We definitely don't want to pressure our kids to go to a four-year university, when the cost/benefit of that sort of education has been declining.

Over what period? Chart 5 in this NY Fed report suggests that over anything but the shortest term, the return on the cost of four-year college has been fairly steady this century, after a big increase in the last couple of decades of the prior one.

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci20-3.pdf

[formerlydivorcedmom]

I have both an ESA and a 529 plan for each of my kids.

The ESA allows me to invest in whatever funds I want (like an IRA).  The 529 plan is more like a 401(k) - you have to choose from the plans that are offered in the 529 that you pick.

There's a $2000 limit per year per child for the ESA.  We max that and then put a little extra in the 529s. 

I live in a state without income tax, so that isn't a factor for us.

[Cognitive Miser]

We definitely don't want to pressure our kids to go to a four-year university, when the cost/benefit of that sort of education has been declining.

Over what period? Chart 5 in this NY Fed report suggests that over anything but the shortest term, the return on the cost of four-year college has been fairly steady this century, after a big increase in the last couple of decades of the prior one.

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci20-3.pdf

Ah, well I admit that I don't have data like yours.  But we are not biased like some parents are against our children working in the trades or in entrepreneurial pursuits.  I need to learn more about specifically how this money can be used; I assume trade school is fair game but am not 100% sure.

[oldtoyota]

I wish we had not done the 529. We probably have too much money in it--who knows for sure?--and 529ers get penalized for removing money for anything but education. I don't care for the restrictions and probably should have saved the 529 money with the other money I saved.

Live and learn.

[OutdoorsLife]

Hi, I'm new to the MMM community!  This topic is something that I've been interested in for a long time.  I'm enjoying reading everyone's posts about the 529 and ESA plans.  A long time ago I remember hearing a financial adviser recommend maxing out retirement contributions before contributing to these education plans.  I'm wondering if that was good advice... 

[CanuckExpat]

I remember hearing a financial adviser recommend maxing out retirement contributions before contributing to these education plans.  I'm wondering if that was good advice...

Yes, generally it is.