A 529 is a type of account that lets you minimize taxes when paying for college and other qualified educational expenses. It’s the go-to account savers are advised to set up for their kids (or themselves).
A 529 is a great idea for short time horizons. For example, if you’re getting a Masters degree right now, and you’re paying for some of it out of pocket, open an account ASAP.
While you won’t use it to invest, you can still put money into it, and the first $4,000 is tax deductible. That amount of money isn’t paying for all of your college, but it’s still less you’ll be liable for when it comes to taxes that year later on.
Typically, the money you put into a 529 you’ll invest in normal stocks (AKA probably an index fund) and wait for it to accrue.
Why a house?
Glennda Baker had a brilliant idea (giving her the credit since she’s the first one I heard this from).
- If you’re saving for a young child’s future college, do not open a 529, but instead buy a house
- Use that house for rental income
- Put rental income into tax efficient accounts (maybe even a 529 to capture that 4k deductible each year)
The benefits of doing this include:
- Real estate has generally better returns than stocks
- You have a cash-flowing asset, instead of just a static asset (dividend stocks do this too, to be fair)
- You can sell the house eventually, or make it a gift to your child (when future housing will be even more expensive)
This doesn’t include a lot of the intangible benefits, like teaching your child valuable skills around upkeep and management of a property, seeing and touching it themselves, instead of just seeing “number go up” on a paper and chart.
The trade-offs of doing this include:
- No diversification in a house vs in an index fund
- Real estate investment is definitely illiquid compared to stocks you can buy or sell in the same day
- You can start investing with a $1 in a 529, but you need at least a down payment for a house.
- More to manage (i.e. learning how to be a landlord)
Time Horizon
For me, the real clincher for all of this is timeline.
If you have 18 years to build a college fund, and definitely if I planned to stay in the same area, I would strongly consider doing this for a child. You enough time to pick out a property, learn how to manage it, etc. Even if you move out of the area you’re living in now, you can still run it with local property managers and well-vetted tenants.
This isn’t something everyone can do. If you’re lucky enough to be able to, think outside the box when it comes to funding your children’s futures. If I know you in real life and this interests you, please talk to a real financial planner and let me know if they think this is a terrible idea.
