How I Set Up a 529 Plan For My Niece (And What I Wish I Knew First)
Last Christmas, I sat cross-legged on my sister’s kitchen floor amid crumpled wrapping paper and half-eaten sugar cookies, watching 7-year-old Lila spread her homework across the table. She was drawing constellations for her first-grade science unit, pausing every few minutes to announce she’d be going to space camp in a few years, then to “NASA college” after that. My sister wiped down the crockpot we’d used for chili, and sighed when Lila mentioned the after-school gifted science program her teacher recommended. The $300 semester fee wasn’t in their budget that month, she told me later on the porch, and she and my brother-in-law were still chipping away at their own student loans from 15 years prior.
I’m 32, single, with no kids of my own. I’d gotten a small raise that year, and I was tired of gifting Lila another stuffed animal or art kit that would get forgotten by February. That night, after I drove home, I started googling 529 plans, fully expecting I’d find out only parents could open one for their kid. I was wrong.
Turns out, anyone can open a 529 plan for anyone else. I’d always assumed these accounts were only for wealthy parents saving for full tuition, but that’s not true either. Most direct-sold plans let you open an account with an initial deposit of $25 or $50, and you can set up automatic contributions for as little as $10 a month. I opened mine with $50, set up an automatic $25 a month transfer—less than I spend on takeout lattes most weeks, and it’s barely noticeable in my budget.
The first big mistake I almost made was picking an advisor-sold plan. I saw a bunch of ads from financial advisors offering to help you set up a 529, but those plans almost always charge extra annual fees that eat into your growth over time. I went with a direct-sold plan through my state, which gave me a small $50 deduction on my state income tax the first year I contributed. I did spend 15 minutes comparing it to low-cost national plans from Fidelity and Vanguard before I decided, and that’s the only homework I had to do. If your state doesn’t offer a tax break for contributions, a low-cost national plan is usually just as good.
Another thing I didn’t know before I started: because I own the account, not Lila or her parents, it has a much smaller impact on her future financial aid eligibility than a parent-owned 529 would. FAFSA barely counts non-parent owned assets for financial aid calculations, so that’s a nice unexpected bonus for my sister and brother-in-law, who are already worried about how they’ll cover tuition in 11 years. I also learned pretty quickly that you don’t have to worry about the money going to waste if Lila doesn’t end up going to college. I can change the beneficiary to her 4-year-old brother, or any other family member, any time with no fee. New rules also let you take out up to $10,000 a year for K-12 tuition, so if she needs private school or a special program down the line, the money is there for that. It can also cover trade school, apprenticeships, room and board, even textbooks for a four-year degree—flexibility I didn’t expect when I started.
When I told my sister what I was doing, she teared up and tried to talk me out of it, saying it was too much. I told her I wasn’t dropping six figures on this, just putting aside a little every month that I’d otherwise spend on random weekend trips or clothes I don’t wear. We agreed I’d send her a copy of the annual statement every year, so she can include it accurately on future financial aid forms, and that Lila would know what the account is for in age-appropriate terms. We didn’t sit her down and explain compound interest or tax-advantaged growth. We just told her it’s a special savings account just for her, for whatever big thing she wants to do when she grows up. She drew a picture of a rocket ship with a crayon and taped it to their fridge, right next to her soccer trophy.
I went to her elementary school science fair last month, where she presented a project on black holes that won second place. I handed her a $100 check to put in her account, and she let me tape the sticker she got for her project to my fridge at home, next to my grocery list.
I don’t kid myself that $25 a month is going to cover full tuition at whatever college she wants to go to. By the time she’s 18, the account will probably have around $5,000 to $7,000, depending on market growth. That’s enough for a full year of textbooks, or two semesters at a local community college, or a down payment on a used car to get her to and from campus. Even if it just covers one less loan payment after she graduates, that’s one less weight on her shoulders when she’s just starting out. I remember what it felt like to graduate college with $22,000 in student debt, and how that debt delayed me getting my own apartment, buying a car, even taking a vacation for five years. I don’t want that for her, if I can help it.
Last week, she called me to ask if her savings was enough to send her to space camp next summer. I told her we could pull the money whenever she wanted, no questions asked. She thought about it for a minute, then said she’d rather keep it for college, because “NASA college is way more important than space camp.” I don’t know if she’ll still want to go to NASA college when she’s 18. She might decide she wants to be a wildlife biologist, or an elementary school art teacher, or skip college entirely to open a bakery. That’s fine. Either way, the money will be there for whatever she chooses. It’s not my job to pick her future. It’s just my job to give her a little more room to choose it.
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