Can you imagine having a 529 child millionaire? With the cost of education continuing to skyrocket, creating a 529 child millionaire might be a necessity for parents with children under five nowadays.
With regular contributions, company matching, profit sharing, and conservative returns, many of you will eventually become 401(k) millionaires. But what may be more exciting is if your children become 529 plan millionaires before they even get their first full-time job!
With $1 million by the time your child gets their first full-time job, they’ll be able to live a life of leisure (or purpose). They won’t feel pressured to take a high-paying job they hate just because society says it’s prestigious work. Further, they might feel less guilt knowing their parents didn’t have to sacrifice so much to pay for their private school tuition.
Think about how many more young adults would become teachers, non-profit workers, journalists, and volunteers. Clearly, the world would be a better place if everybody did work they loved. There is no greater love than being able to help others.
By going the public school route from kindergarten through college, the vast majority of parents who are able to pay private school tuition in the first place, will have accumulated $1 million or more if they diligently save and invest the difference for 22 years.
Given the tax advantages, let’s use the 529 college savings plan to see what type of contributions or returns are necessary to make millionaire dreams come true for kids.
Becoming A 529 Child Millionaire
If you follow each of the three contribution scenarios you will be able to create a 529 millionaire.
Contribution Scenario #1: $15,000/year
As a single parent with no contributions from anybody else, making your kid a 529 millionaire is going to be difficult. You’d have to contribute $15,000 a year for 18 years and earn a compound return of 12.6%. Active fund managers have achieved such results before, namely Warren Buffet. But you aren’t Warren Buffet.
Your goal should be to convince the absentee father or mother to do the right thing and at least contribute to the child’s education as well. Another solution is to find a new partner who is willing to pitch in.
$15,000 a year was the current maximum gift limit for estate tax purposes in 2020. In 2023, the gift tax limit is $17,000.
Contribution Scenario #2: $30,000/year
With two parents contributing $15,000 a year to their child’s 529, becoming a 529 millionaire is highly possible. After 18 years of compounding at a more achievable 6.2% rate of return, the 529 plan will have ballooned to $1,003,512.
Based on historical returns, a 6.2% annual rate of return can be achieved with a 20% stock, 80% bond portfolio. Perhaps future rates of return will be lower for both stocks and bonds, but all the same, even a 50/50 allocation is quite conservative and may achieve a 6.2% IRR.
Contribution Scenario #3: $45,000/year
Another great way to get to 529 millionaire status is to convince one or two grandparents to contribute a combined $15,000 a year. Many grandparents I know are more than happy to help out their grandchildren while still alive. With $45,000 a year compounding at just a 3% rate of return for 18 years, the 529 plan will have grown to $1,012,908.
Your goal should be to ensure the grandparents live as long as possible and have a healthy life. This means regularly calling, e-mailing, and visiting them. Show them the love and respect they deserve for raising you to be the outstanding citizen that you are. They will love that you are an unselfish parent willing to put your kids first.
Of course, if you can somehow get multiple grandparents and relatives to contribute more, then your child will likely be a multi-millionaire after 18-22 years. But this is an unlikely scenario so let’s leave things at $45,000 a year in contributions.
My Son’s Current 529 Plan
My son currently has ~$230,000 in his 529 due to me superfunding his account in 2017, and contributions from my wife and his grandmother in 2017 and 2018. Based on the superfunding rule, I won’t be able to contribute any more money for four years.
Our base case will be $15,000 a year in 529 contributions from my wife for 17 more years. To reach 529 millionaire status, we would need a 7.9% annual return, which while attainable, is probably too optimistic as the fund gets less aggressive closer to the target college date.
529 Child Millionaire Game Plan
Thus, to be more realistic while still increasing the chances of getting to $1,000,000 before he goes to college, I will be lobbying for at least one grandparent to contribute $15,000 a year along with my wife’s $15,000 annual contribution.
To demonstrate appreciation to a grandparent or two, my son will regularly write letters updating the grandparent(s) on how he’s doing. He’ll learn about the power of investing and the purpose of his education. A win all around!
In such a scenario, all we need to do is return 4.2% a year to get to 529 millionaire status.
If I somehow fail at convincing any grandparent or my wife to contribute $15,000 a year, all is not lost. Starting in the year 2022, I can start contributing $15,000 a year or more again. But his plan would have to earn closer to a 8.5% compounded annual return.
Below is the chart of my son’s 529 plan I started in July 2017, a couple weeks after I received the proceeds from my SF rental house sale. I felt bad selling the house because I had envisioned keeping it for him to manage and/or live in one day. It was our insurance policy against runaway real estate inflation 20+ years from now.
But the maintenance, tenants, and $23,000 a year in property taxes really started getting to me, so I sold to simplify life. The least I could do was start his 529 plan and conservatively redeploy the rest.
A Better Child Millionaire Solution
The problem with being a 529 child millionaire is that you can only use the 529 money for education. Further, there are limits to how much you can contribute to your child’s 529 (~$300,000 – $520,00 depending on state), even though that limit is always rising. Thus, you won’t be able to gift your little one any balance that’s left upon his college graduation, even if he does go to public school.
Further, if he gets one whiff that you are trying to make him a 529 millionaire, he will likely decide to go to the most expensive private school available and use up all the money! Shhhh.
The clear solution for making your child a millionaire by 22 is to grow their 529 plan to the cap for tax benefits and then open an after-tax brokerage account or digital wealth advisor account once the cap is reached and consistently contribute.
You can model the structure of the after-tax portfolio to one of the many 529 target date funds if you so choose. Any funds left over after college expenses can then be reabsorbed into your estate or given to your child if s/he makes you proud.
You’re free to contribute much more to your child’s investment account if you are willing and able. However, it’s probably not a good idea to make your kid a multi-millionaire upon graduation, otherwise, your child might lose all motivation.
Related: Contribute To A Roth IRA Or 529 Plan?
A Good Idea To Make Your Child A Millionaire?
I believe that if my parents had cut me a surprise check for $1,000,000 after graduating from The College of William & Mary in 1999 I would not have slacked off. Instead, I would have been so grateful and used the gift to take more calculated risks.
The whole point of my going to William & Mary was so that I could minimize their financial burden. Tuition was only $2,800 a year when I went, so I knew that I could pay them back even by working a minimum wage job. They worked government jobs, hence, were middle class folks.
With $1,000,000 in the bank, I would have certainly bought the 2/2 Manhattan condo I missed for $799,000 back in 2000 that would now be worth over $2,000,000 today.
With the remaining $800,000 or so, I probably would have invested at least $30,000 in VCSY instead of just $3,000. The $30,000 would have turned into $1,500,000.
Dangerous To Have So Much Money So Young
With that type of money at age 24, I would have confused brains with luck and eventually lost a fortune investing in other internet stocks.
I’d like to think that I’d still work until age 34 because for at least 10 years I enjoyed working in International Equities. It was exciting times because both China and India were opening up to foreign investment in the early 2000s. But there was a moment at age 25 when I really wanted to move back to Hawaii and just chill out due to the events of 9/11.
With at least a $1,500,000 net worth at 26, it would have been very tempting to call it quits and be a surf bum. Then again, with so much money, I might have left banking earlier to join or create a successful startup.
Parents Need To Be Careful
It’s important for parents who plan to diligently save for their child’s education to do the following:
- Never tell them of your plan to make them millionaires
- Continuously demonstrate sound financial habits in front of your children
- Continuously demonstrate a good work ethic
- Provide them with ongoing financial education
- Make them work minimum wage jobs in high school
- Make them volunteer to help others less fortunate
- Open up a custodial Roth IRA to build the habit of saving and investing regularly
Because we lived in a very humble townhouse and my parents drove an 8-year-old Toyota Camry when I was in public high school, I appreciated every single dollar my parents provided. But if my parents had driven new BMWs, lived in a mansion as some of my friends did, and I went to a private school, I probably wouldn’t have appreciated any financial gifts they may have given me.
Whether you want your kid to have a million bucks or not, you’ll likely have this option if you simply save and invest consistently for him. If you don’t want to make him a millionaire, then you can simply be one yourself.
How’s that for the power of financial discipline? Once you know what’s possible, everything becomes more achievable.
Related posts:
If You Want To Be A Real Millionaire $3 Million Is The New $1 Million
Everything To Know About The 529 College Savings Plan
Recommended 529 Amounts By Age
If your 529 plans change: 529 plans offer significant flexibility should the designated beneficiary (student) decide not to attend college, or if the funds are not used for other qualified educational expenses. You can take out the money as a non-qualified withdrawal, but any earnings on non-qualified distributions are subject to federal income taxes at the recipient’s rate as well as a 10% federal penalty. Of you can use the funds on another family member.
A 529 plan is a great generational wealth transfer tool. I’d much rather give my loved ones an education than just money. If your kid becomes a 529 plan millionaire, at least a portion of the funds can be rolled over into a Roth IRA starting in 2024.
For the record: My hope is that my kid wins the SF public school lottery and gets to go to a great public school that’s not too far away from our house.
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Graphic by Colleen Kong-Savage.
One thing I am surprised was not mentioned was the ability to use a 529 as a perpetual family education fund.
The beneficiary of 529’s can be changed to anyone in a family. Ideally this would allow a large enough portfolio to grow forever and be able to provide funding for education for generations to come.
I have seen some discussion of this on financial advisers and lawyers websites.
As near as I can tell, this is a fabulous way to avoid taxes for generations. Congress will probably eventually change this, but until it does let’s take full advantage of it!
My husband and I are blessed to be in a very secure financial situation. We are considering front-loading our kids 529s if/when the market corrects. I’d love to hear more of your thoughts on pros/cons of potentially overfunding 529 accounts. It seems you are on the side of aggressively funding 529 accounts. I recently read another article in support of this (http://rpgplanner.com/529-plan-opportunity/) but a financial advisor that I spoke with recently recommended being conservative with my kids 529s to avoid the penalty and putting extra money into other investments (taxable brokerage, real estate).
How would you advise a single parent approach 529 savings for two kids, and starting late (6th grade), on a modest income (approx $125K), in a high cost of living zip code.
I believe this advice as written is for much higher income, single child, dual income families. Unfortunately, that is not me!
Thank you
My opinion:
I paid for my brother’s tuition – Masters (5 years younger than me) 4 years back, so I can talk with recent experience. This probably sounds a big deal, but I am an immigrant and in my culture, it’s OK for the elder sibling to look out for the younger one. It’s actually a proven ticket out of poverty.
There are 2 perspectives of this article. The first is that of prudence – will it cover all education related expenses, if the current tuition bubble keeps growing? The second is about gifting financial freedom to your child. I have my perspectives to both.
Prudence:
This is the perspective I would mildly entertain. Gifting your child a life without student loan is a big deal. You are giving a kid the opportunity to fly as they wish. You are handing them a clean slate. I love that aspect of a education fund. However, $1M, the only way I could justify is the brand! Personally, I don’t see myself justifying a $1M tuition/expenses, but that could be because I am an immigrant, employed in hi-tech, where your alma-mater helps open the door for your first job. After that, not as much.
Gifting Financial Freedom:
This comes from my experience. I do not like this option.
My brother got a free ticket to a Masters degree in the U.S. I pretty much put 3 years of diligent savings. That delayed my personal milestone. My “why” for the sacrifice: It would worth it, if it helped kick start my brothers life. I was giving him a 5 year head-start in comparison to his peers (Post-master, he would start as a Project Manager, I took 5 years to get there).
What I discounted is that my brother had no clue how much I gave up (eating PBJ when the rest of your colleagues are going out for lunch specials does hur). He did not have the fire-under-the-belly mentality that I had. I grew up with him, we went to the same school, we lived in the same place. I just assumed, he would be like me. And there was no way, I would have predicted that he would be that much of a slacker. I love him, I wanted the best for him. I was blinded by that. I thought, it would just work out! This is a miss in my judgement, I agree. AND, I believe every parent would be blinded by a similar emotion !
Huge gifts, rarely have the desired income. I have come to see that the receipient invariable starts believing that they deserve the entitlement and that creates a new problem.
My take:
I would probably only fund the education costs. Specifically, I want my kid to have skin in the game. My thought: I will be paying for tuition and books, the rest of the expenses, my kids cough up. I could be brutal and wrong, but I have been burnt once!
I would still save the $1M, but that money would be inheritance and be routed through trusts. And they would have to earn it – academic scores, volunteering, age-based accomplishments etc. Personally, giving free money is like gifting a a gun. You can teach all you want, they are the ones who pull the trigger. I would rather they earn it !
Again, this is my personal opinion. I believe the Sam – big fan – has the right intention. It’s probably not what I would do.
This article is pretty timely for me. I just started toying with the idea YESTERDAY of doing a 529 for my nephew. He’s less than a year old.
Of course, he won’t be a 529 millionaire. His father died mysteriously (cause of death is still unknown) and his mother doesn’t work (yet). I’m sure she will start saving for him and I’m sure the grandparents will pitch in as well. I don’t plan on putting much in myself, but I figure regular contributions of about $25/paycheck plus investment gains should help pay for SOMETHING.
I wouldn’t just hand someone that kind of money at that age ($1,000,000). They need to prove themselves. Even if the kid goes onto to support himself in a crappy apartment with a low paying job, at least the kid would experience the wealth that he/she earned. If I had that money to be handed off to a child, it would come with some strings attached.
Good article.
Sincerely,
ARB–Angry Retail Banker
We’re not saving a single penny for our two young children. Not one cent. But we are spending a considerable amount of time teaching them about personal finance, entrepreneurship, business, responsibility and anything else needed for them to launch their own businesses long before high school.
Maybe they’ll become millionaires, maybe they won’t, but it will a conscious choice on their part.
Self-made millionaires will never be confused with trust fund babies. Never.
It’s hard to believe that FS would actually advocate for this given his personal life story and work ethic. I suppose it will take more exposure to the latter group – and perhaps his own children down the road – before reaching the same conclusion. It even seems like he’s already vaguely aware of this conflict given all the “Shhh, keep it secret” comments in the post.
A well known quote on my desk says “Happiness is not a state to arrive at, but a manner of traveling.” The same applies to achieving FI. You certainly don’t achieve FI (much less work ethic, character and any number of other wonderful life skills) by opening your hand and having Dad drop a $1M check into it on your 21st birthday.
I like the article and agree with a great many of the comments. But I will add young persons can be given opportunity but they need to have a sense of “skin in the game.” My wife and I work and are putting money away for all these things in our children’s lives and want them to do better than ourselves (every parent’s desire).
But the money will not be unconditional. Standards will be met to get the money. The money will also not be flat given for event. Our children will be on dollar for dollar match program for everything: first car, tuition, wedding, etc. They and their future partner will need to show what they bring to the table.
Great job funding that much for your son’s 529 plan. I think funding a million bucks for college is a bit too much but the idea of constantly funding the account and seeing it grow by the compounding effect shows that you are dedicated to cover most, if not all costs for your kid during their time in college.
If I had a million dollars in my son’s 529 plan, I would not disclose to him that amount because it may not motivate him to do well when he’s in college. He may take it for granted because the costs are covered and may put a higher priority on doing other things like hanging out with friends or going to college parties.
Before he gets to the college level, I will try my best to teach him basic finances like learning how to value money, saving and the power of compounding. I want to give him that awareness that money is great tool to achieve your goals and provide happiness.