Thoughts on 529 Savings Accounts
@alextreece asked a great question in the comments of my previous post about what type of account I am using to save for my kid's future.

Initially, I was putting off starting my savings project because I didn't know which type of account to use, and then I realized that the most important thing was to just start. So I initially started with a vanilla brokerage account.

Funny enough, taking that action then motivated me to reach out to a friend who knows a bit more about 529s and now I'm talking with him if we should roll it into a 529.

The benefit of a 529 is that they are not subject to federal income tax if you withdraw to pay for "qualified higher education expenses." This covers a lot of types of education, but nevertheless it still got me pondering what the future of higher education will look like in 20 years.

For context, I just finished a 2-year mastery-based online coding school, which I paid $200 monthly for, (A total of $4,800 for the whole program) and it was a better educational experience than either of my two masters degrees or undergrad. This kind of program does not qualify for 529 funds, since it is not offered through an eligible college or university. (although it's also affordable enough that huge savings wouldn't be necessary for it.)

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I have no idea what my future kid will be interested in, but part of me has a sneaky suspicion that educational opportunities will evolve faster than tax policy.

And as things stand now, according to sec.gov, if 529 account withdrawals are not used for qualified higher education expenses, they will be subject to state and federal income taxes and an additional 10% federal tax penalty on earnings. Ouch.


So, if your kid doesn't end up incurring a "qualified higher education expense", not only will you lose the tax advantages, you will also LOSE 10% of all that money you saved🤦🏼‍♂️.

While it seems unimaginable (and perhaps malicious? haha) for me to bet/hope my kid DOESN'T go to college, my prediction right now is that the American dream will be best achieved by vigorously pursuing non-legacy forms of higher education 20 years from now.

A 529 plan isn't helpful if it incentivizes you to go into debt for a degree that isn't useful. Looking at the bigger picture, the best way to save money would be to start talking to your kid early about what is truly the best way to get the education, experience, network, and opportunities that college ostensibly provides.

I don't want the end result of planning 20 years ahead to be to saddle my kid with 20 years of debt.

So right now I have not rolled the new savings account into a 529. I might down the road for future deposits. But at the end of the day, I'd rather be late in deciding the type of account to use than being late to starting to save.
Josh Worden's avatar
That's a good point! I had thought of other road blocks- what if I don't have a kid or they just don't go to college at all, etc. but you bring up the additional question of what does higher education even look like when my kid is 18? And if this backfires, it does so significantly (tax + 10%) so... it's risky!
Nathan Worden's avatar
Exactly! Lots of unknowns. Regardless, the best thing to do is to start saving now, whether that is in a 529 or otherwise. Not starting to save because you're not sure which account to use is actually the worst thing to do.
Sravan Vegunta's avatar
@nathanworden Look at Coverdell ESA. I like it a lot.
Nathan Worden's avatar
Thanks @sraone I’ll look into Coverdell ESA. That’s the self-directed tax advantaged savings account for educational expenses, correct? (The only one other than a 529 in The IS tax code). Looks like the maximum that can be put in a Coverdell ESA is $2,000 per year. And it looks like it also can only be put towards accredited colleges and universities, although I’m not seeing a 10% penalty for using the money for something else.

Do you currently use a Coverdell ESA to save for a kid’s future educational expenses?


Sravan Vegunta's avatar
@nathanworden One other issue you have not mentioned about using 529 plan is that the number of investment options are limited.
Nathan Worden's avatar
Yeah that is another big downside. Looks like the Coverdell ESA allows you to invest in pretty much anything your brokerage institution has access to, which is nice. And it is not taxed as income or capital gains when its withdrawn for educational expenses, so that’s pretty cool.
Marshall McCready's avatar
Hm I like your post and I think I agree with your prediction “that the American dream will be best achieved by vigorously pursuing non-legacy forms of higher education 20 years from now.” But my intuitions on this front are conflicted.

On one hand, the US has an over-educated workforce. There are more people with PhDs than jobs which require PhDs. The standards for acquiring a PhD have been lowered by the increasing bureaucratization of higher education. Colleges and universities are financially incentivized to increase enrollment and lowering academic standards is one way of accomplishing this. Also primary schools are failing and Americans are getting dumber. One of the problems with the churning out of phds and graduates is that it lowers the market value, in other words the credential value, of degrees. Instead of addressing this root issue somehow, we’ve constructed an artifice of perpetually increasing specialization. The book The Checklist Manifesto discusses this well. There are no longer just surgeons, or just oncological surgeons, but oncological surgeons who specialize in the removal of tumors in one bodily region.

This is good for the incomes of surgeons and good for the medical treatment of the relatively more privileged, but bad for society as a whole. Sam Harris’s podcast with Daniel Markovits (ep #205) discusses the asymmetrical benefits of this specialization process for upper class people and lower class people. For one thing, it dramatically increases the barrier of entry to these positions.

Paralleling this hyper-specialization and “complexification” (I apologize for this term) of industry is the democratization of education. You can take Harvard courses online for cheap! You can attend rigorous boot camps and gain profitable skills for a fraction of the cost of attending a university! This has changed the game and it catalyzed the specialization process. For universities to offer degrees of value in the market, degrees need to be worth their price. The credential model which privileges university degrees is responding to the pressure by deepening specialization, but this is a losing strategy because not enough people have the talent or skills to become specialists of this caliber. The model is going to break soon, we’re already seeing the cracks.

It seems like industries are catching on about the sort of scam universities are running. They are increasingly recognizing university degrees aren’t as great as they’re supposed to be and that the people with the initiative to take boot camps or self-educate may be far better suited for the positions they’re trying to fill. People are going to realize the cost of higher education isn’t actually worth it in most cases. I think corporations are going to start implementing increasingly sophisticated competence tests of their own and barely even consider people’s degrees. This is the norm in some industries already.

The impending crisis over the utility of a degree is wider recognized. But the academics bemoaning it typically advocate for people to make decisions they themselves would never make (e.g., “Skip college and get into construction!”). What they often mean is “Hey you relatively more stupid talentless people, skip the creative thinking and become a machine!” Pretty cynical, but I stand by this.

Gun to my head, my prediction is that a lot of universities and colleges are going to completely fail soon. I think colleges will stop churning out mostly useless PhDs. There will be far fewer phds granted and programs will become crazy rigorous. This is the only realistic way at this point to reclaim the market value of degrees as far as I can tell. For most people, specialized training programs disconnected to traditional higher education institutions will prepare them for their careers. It will become normal and expected that people will go through multiple different programs for multiple different careers in their lifetime.

The key investment question is whether these programs will be considered “qualified” in the way established higher education institutions are now. My bet is that they will be, but this transition is at least a decade out.

If I’m right, the quality of the investment may depend on how much faith you have that your kid will be brilliant haha
Nathan Worden's avatar
I love this thoughtful, nuanced answer. One of the reasons I have liked Coursera and MOOCs so much is the whole "Look! You can take Harvard classes online, the playing field is now even!!" stchick.

But your well-thought out reply makes me realize that the financial opportunity benefits of higher education still go to only the select few. Higher education can be democratized but that doesn't necessarily spread the wealth around.

So many interesting things to unpack here. Rest assured, you have inspired many more memos with your thoughts haha
Sravan Vegunta's avatar
@nathanworden I use a mix of Coverdell and regular investment accounts to save for my kids future education expenses.

The biggest downside to Coverdell is like you pointed out the $2000 yearly limit.
Nathan Worden's avatar
Gotcha, makes sense. Well, $2,000 a year is better than nothing. And maybe 20 years from now Launch School will be covered by accounts like Coverdell and it will work perfect because the cost of Launch School and the limits of Coverdell contributions are commensurate!

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