Question: Am I over-funding my children's 529 plan for college?

Do you contribute to a 529 plan?

I'm deathly afraid of over-funding my children's 529's for college. Right now we're aggressively funding their 529's to help cover most of their undergraduate educations. However, if either of them don't spend much for college (maybe they go to trade school, earn tons of scholarships, etc.), then we will have this money locked into these 529's and penalties to pay on the way out! Our financial adviser says that the money can always be used for a relative, but I'm not sure I want to give $20,000 to a niece or nephew (who are already well-funded). Should we be saving a portion of college-earmarked funds elsewhere?

Response:

Great question!  So often we take the idea of saving for college for our kids as a given.  But what if your child grows up and says, "Nah, Mom ... I'm just gonna apprentice with a pastry chef"? 

This is why I limit what's saved for my daughter's college. What if she doesn't want to go?  

The creation of 529 plans by the IRS in 1996 was a super-good thing. It's like a tax-sheltered IRA for college and helps thousands of parents and future students. But it also locks you into a product that's built pretty much for one thing. Bigger families may have less to worry about as you can use funds for different kids in the same family. But to your point, all that money for a niece?  (Super Auntie!) 

Instead, I'll ask you this:  How are your retirement savings? You may already be at the contribution limits for IRA's, but why not build other assets that you could not only use for your golden years but also hand down to your daughter? Remember: taking care of Mom and Dad is also a way to protect and care for your daughter. If you save too much for college and not enough for you and your spouse, she may end up being forced to support you down the road. Keep her 529 in the land of 'okay' and instead bulk up your own assets. You can always use your other assets to help her if she goes to college and needs it.  Who knows, that pastry apprenticeship could lead to her needing your money to help her become the next 'Cake Boss'!

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