QUESTION: Cindy in California heard an unused Post-9/11 GI bill can be transferred to children. She wants to know if she should save in an ESA or a 529 plan or rely on the GI bill for her child’s education.
ANSWER: I don’t know that I would do an Education Savings Account, because that has to be used for college. The Post-9/11 bill will pay for college, which is a wonderful benefit.
Once you’ve gotten to Baby Step 5, where you are out of debt with a full emergency fund in place and are saving 15% of your income for retirement, I would save some money for your kid’s college, but I would save it in your name. That means when they get to college, there will be a few odds and ends that the 9/11 bill won’t cover.
There is also a slight possibility they change that on you because we’ve got this little thing going on called a fiscal cliff. They are going to cut a bunch of stuff eventually. They will either do it voluntarily or they’ll do it because they’ve completely run out of money and the economy collapses around their ears.
Someday, somebody is going to say no to somebody, and you could be on that list. I hope you’re not, and I’m not predicting that. But just in case, I’d love for you to have some money set aside for college. I wouldn’t count on the government.
I would not do a 529 or an Education Savings Account for college, because if you use that money for anything other than education, you are going to get taxed on it and penalized for it huge. You can do an UTMA, but that’s in their name. You can use that for anything; that’s just a mutual fund in your kid’s name with you as a custodian. You could do that as well.
An UTMA is fine, or if you just have a mutual fund and you call it “kid fund.” That gives you the money to do something for education if there is a problem and/or there are things that the bill doesn’t cover. I wouldn’t say that it allows you to save nothing for college, but I would say to not use the 529 plan or the ESA because you probably have that covered with this bill.