Can You Create a 529 Plan for an Unborn Child?

August 21st, 2020

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If the words “student loan debt” send a chill down your spine, making you squirm in your seat, and you wish for your children to witness a debt-free future, we are here to help. With rising college tuition costs and increasing student debt burdens, it is likely for our kids to start their careers with unimaginable debt if left unchecked.

Planning your child’s education may have a lower priority as compared to your retirement plan, however, systematic planning can help your child acquire a great education and a better future.

What is a 529 Plan?

A 529 plan is a college savings plan that allows you to contribute post-tax dollars into an account that grows tax-free and can be withdrawn tax-free if used for qualified education expenses. 529 plans are state sponsored and may offer some tax benefits; however, you are not obligated to use your state’s 529 plan.

To open a 529 college savings plan, one must be a US citizen and provide a social security number or individual taxpayer identification number for the beneficiary.

Can you create a 529 plan for an unborn child?


The IRS requires a living beneficiary to open a 529 account, therefore, an unborn child cannot be the beneficiary if you plan to open a 529. Instead, a parent may open an account before the child is born and list themselves as the beneficiary. Later, the parent can change the beneficiary on the account to the child’s name.

Why contribute before having a child?

Starting a college savings plan even before having any children might seem very strange and unnecessary, but there are good reasons to do so. Let me highlight some of the benefits of opening a 529 account for an unborn child:

Power of Compounding

What better way to protect your child’s future than to let the power of compounding work in your favor and help your money grow. The sooner you start, the more time you have to let these savings grow tax-free and have a hefty sum for the future.

For example, if you contribute $20,000 to a 529 account today with no future contributions, assuming an average 8% market return, your initial savings will have grown to $93,219 over a period of 20 years. That is a fantastic head start for a child aspiring to have a great education.

Tax Breaks

Let’s face it, we all hate taxes, even though we shy away from admitting it. Various states have different tax benefits for contributing to a 529 plan. Currently, over 30 states in the United States are offering a tax break for contributing to a 529 account.

For example, the state of New York offers a $5,000 deduction for individuals and a $10,000 deduction for married couples filing taxes jointly. Check the benefits your state is offering to decide if it is a great addition to your investment plan.

Teaching your kids about money

We have all cursed the education system at some point for the lack of financial education and its inability to inculcate the habit of financial planning and saving from childhood. By setting up a 529 account, you will be setting the right example for your child and teaching them a valuable lesson to plan their finances.

Receiving Gifts

Would you rather have your friends and family contribute to the college fund for your kids or bring more stuff you lack the space for on their birthdays? Having a 529 account ready can help you receive cash contributions from loved ones towards your child’s bright future.

What are the Risks?

You decide to never have kids

Having a child can be a huge responsibility and may seem overwhelming for several couples, leading them to never have a child. Whatever may be your reason, it is a reasonable concern if you have already started contributing towards a 529.

Remember that a 529 account for an unborn child will list you as the primary beneficiary and if you decide not to have kids, one option is for you to use it for your own education expenses. If you plan on taking a part time course or learning a new skill, you could easily utilize these savings tax-free.

Another option is to switch your account to another family member, such as a niece or a nephew and help them have a better education. If the new beneficiary is not a member of the family of the former beneficiary, the change will be treated as a non-qualified withdrawal and will incur a 10% penalty and income tax on earnings.

Your child receives a full scholarship

While you will most certainly be a proud parent knowing your child is independent of your college fund, this does not imply your savings and hard work were a waste of time.

Consider this college fund as an investment and if you are facing a situation where your child will not need it, you still end up with excess money. The only caveat is that any withdrawals towards non-qualified education expenses will incur a 10% penalty and ordinary income taxes on the earnings.

Assuming the previous example of investing $20,000 into a 529 which has grown to $93,219 over 20 years, your 10% penalty and income tax will be on the earnings of $73,219. This may not be an ideal situation; however, you will be staring at a windfall you can use the way you want.

Final Thoughts

As a parent, it is a responsible and mature decision to start planning for their child’s future, and a 529 account can be your first step to a long-term goal. Even if you do not have a child today, but intend to have one later, it is best to start early, no matter how small your contribution.

It is cheaper to save than to borrow and with the power of compounding helping you grow your investment, you will not regret the decision to begin early.

Consult your financial advisor today to learn more about opening a 529 account and explore various investment options to maximize its benefits.

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