Kick Off College Savings Before a Child Is Born

US News

Brian and Elisa Keller's unborn child doesn't have a name yet - but does have a college savings account.

The Washington couple opened a GradSave account, which allows family and friends to donate money online to a college fund, because many people wanted to contribute to their child's future.

Registry services such as GradSave allow parents to transfer money accumulated on the gifting site into a 529 plan account, a tax-advantaged college investment account, of their choosing.

The Kellers aren't the only ones getting an early start. According to GradSave spokesman Eddie Pradel, it's common for parents to open GradSave accounts before a child is born in anticipation of events such as baby showers.

[Avoid common mistakes parents make when saving for college.]

Gift accounts, which can be for anyone, don't require a name or social security number to open. In the account the Kellers opened, their son is "Little Man Keller," and his photo is an ultrasound image.

But 529 plans are a bit more complicated. Opening a 529 plan account requires the social security number of the beneficiary, the person entitled to use the money in the account.

Parents who want to start saving for an unborn child's college tuition typically tackle the social security number problem in one of two ways.

"Some parents open a 529 plan before the baby is born in their own name and transfer the gifts there," says Pradel. "After the baby is born and they receive a social security number, they then change the beneficiary of the 529 plan to the child."

[Check out ways to save on college costs.]

Colorado-based financial planner Mitch O'Hare started a 529 plan account for his daughter before she was born. He designated himself as both the account owner and beneficiary. Once his daughter had a social security number, he changed the beneficiary to her.

The other way parents handle the social security number problem is to leave gifts received from a baby shower or other event in a GradSave account until the baby is born, says the registry's Pradel, and open a 529 plan in the baby's name once the child has a social security number, then transfer the gifts. The Kellers have already selected the 529 plan they will open once the baby is born and has a social security number.

O'Hare encourages his clients to start saving for college before their children are born.

"Why not just start funding a 529 plan early?" he says. An earlier start means parents have more time for compound interest to accrue.

He predicts parents of children born today will need $150,000 for four years of education at a state school.

If parents are able to earn 8 percent annual interest on their investments, they could accumulate roughly $150,000 by contributing $310 per month for 18 years. If they wait 10 years to start saving for college, the monthly contribution would be have to be $1,100 to get close to that amount.

Parents saving $100 per month from the time the baby is born could save for nearly a third of their child's cost of attendance.

Would-be parents who want to get a jump on college savings should be careful, however, about starting a 529 plan if they have yet to conceive. For varying reasons, sometimes plans to have children don't work out.

While the money in a 529 plan can be used for other family members such as nieces and nephews or for the parents themselves, there is a 10 percent tax penalty, plus income tax on earnings, if the money is later withdrawn for a noneducational purpose, he says.

[Find more tips and advice to help you save for college.]

For the Kellers, having an option to fund their child's education before birth was about continuing a family legacy.

"Both of us received savings bonds growing up from family members that paid for our education," Brian Keller says. "There's only so many things we need for our nursery. Having a baby shower registry that includes college savings feels like the right thing to do for our son."

Trying to fund your education? Get tips and more in the U.S. News Paying for College center.



More From US News & World Report
View Comments (23)

Recommended for You

  • Companies lose billions buying back their own stock

    If you think your stocks are doing poorly, check out the performance of some of the most sophisticated investors, the ones with more knowledge about what's going on inside businesses than anyone else: ...

  • Cramer: Extreme valuations point to a recession

    Jim Cramer found two groups of stocks with wild valuations that could both be forecasting the same future.

  • The big banks will break themselves up before Bernie Sanders ever gets to it

    Shareholders are getting tired of huge banks with weak returns.

  • Asia stocks drop as bank concerns smoulder, yen stands tall

    Asian stocks fell on Wednesday on growing concerns about the health of the world's banks, particularly in Europe, pushing investors into safer assets such as the yen, which stood near a 15-month high versus the dollar. Spreadbetters expected the pessimism to carry over into Europe, forecasting a slightly lower open for Britain's FTSE (.FTSE), Germany's DAX (.GDAXI) and France's CAC (.FCHI). Japan's Nikkei (.N225), which tumbled more than 5 percent Tuesday, suffered another bruising session and slid to a 16-month low.

  • Obama proposes $4.1 trillion spending plan in final White House budget

    U.S. President Barack Obama proposed a $4.1 trillion spending plan for fiscal year 2017 on Tuesday in a final White House budget that met immediate Republican resistance for its cost and reliance on tax hikes to fund domestic priorities. Obama, a Democrat who leaves office next January, sought to outline his fiscal and political vision for the country with proposed investments in infrastructure, cyber security, education, and job growth.

  • Twitter results need to wow to reassure investors

    Twitter's shares have lost more than two-thirds of their value in the past 12 months. "I think the problem is that in the current market any sign of a weak outlook will be quite harshly punished," Atlantic Equities analyst James Cordwell said. Investors want to see Chief Executive Jack Dorsey's strategy to reignite growth in user numbers.

  • Yellen faces tough sell on Fed rate hikes in Congress

    WASHINGTON/SAN FRANCISCO (Reuters) - Federal Reserve Chair Janet Yellen will defend the U.S. central bank's first rate hike in a decade and likely insist that further rises this year remain on track, albeit at a slower pace, when she addresses Congress on Wednesday. Yellen, who is certain to be grilled by lawmakers on whether the economy really is ready for higher rates, will point to continued strong jobs growth even as financial markets have all but priced out any rate hikes this year and as signs of stress in the global financial system have re-emerged amid volatile markets. The Fed Chair also is likely to find herself in heated exchanges with lawmakers over the bank's perceived secrecy, with presidential candidates from both sides of the aisle now taking regular shots at the Fed on the campaign trail.

  • Oil prices rebound from sharp selloff; more volatility expected

    Crude oil prices pushed higher on Wednesday after Iran said it was open to cooperation with Saudi Arabia, partly recovering from an 8 percent fall in the previous session on concerns over demand and weak equities. Prices were supported by comments from Iran's oil minister that Tehran is ready to negotiate with Saudi Arabia over the current conditions in global oil markets. The International Energy Agency (IEA), meanwhile, said the Organization of Petroleum Exporting Countries (OPEC) is unlikely to cut a deal with other producers to reduce ballooning output.

  • BMW sales rise 7.5 percent in January on demand in Europe, China

    BMW reported a 7.5 percent rise in monthly car sales to 152,879 vehicles in January, as growth in Europe and China more than offset a slide in the United States, where winter storms deterred car buyers. ...

  • ESPN casts shadow over 'Star Wars' success at Disney

    Investors nervous about the future prospects for Disney and other older media companies sent its shares down 3.5 percent to $89.21 in after-hours trading. The media networks unit that includes ESPN, the Disney Channels and ABC recorded a 5.6 percent decline in operating income to $1.41 billion. Disney Chief Executive Bob Iger offered a spirited defense of ESPN on a conference call, describing an "uptick" in customers in the last couple months.