SSS #49: Luna's College Fund


I’d love to hear what you think about my approach. Is it too risky? Or is it so crazy it just might work?

Oh and before I forget… Going forward, between the introduction and main content of the email, there will be a new section in SunShakSunday. It’ll be a picture or video update of Luna’s progress.

You’ll understand why after reading this week’s email. I need help naming this section. Please share some ideas. “Luna Update” is not going to cut it.

Luna’s 4 month vaccines were tough, but we made it through!


Luna’s College Fund

My parents paid for my entire college experience.

  • Tuition
  • Housing
  • Meal Plan
  • Books
  • Late Night Pizza, Taco Bell, ...Booze

All of it. Covered. I never saw a bill from the Bursar Office or heard anything about what my education cost them.

But it didn’t start there, my parents also paid for my last two years of public high school because we moved to a different town, but I didn’t want to move to a different school.

When it comes to education, my parents have a firm “no expense spared” policy.

Why tell you all this?

Because now it’s my turn to pay it forward. I’m motivated to provide the same for Luna.

...I’m just really hoping she stays in-state or becomes a famous YouTuber and just skips college altogether. Either works.

Investment Vehicle Alternatives

There are a handful of different ways to save for a child’s higher education.

For the purposes of this post, I’m going to focus on two alternatives:

  1. 529 College Savings Plan
  2. Custodial Roth IRA.

529 College Savings Plan

A 529 is an investment vehicle created back in 1996 under the Small Business Job Protection Act to aid families in funding higher education needs.

Although the contributions are made with post-taxed money, there is a double tax benefit to a 529 plan.

First, the earnings within a 529 account accumulate tax-deferred. Second, the accumulation of tax-deferred earnings, if used for qualified educational expenses, can be withdrawn tax- and penalty-free.

So let’s say Dia and I open a 529 College Savings Plan for Luna and contribute $6,000 per year ($500 per month) for 18 years.

At the end of 18 years, we’ll have contributed $108,000 ($6,000 x 18 years) of post tax money.

Now let’s assume that money is invested in the market and grows at a conservative rate of 6% each year.

Although we contributed $108,000 the account balance would be $197,000 because of the 6% growth rate each year. The money almost doubled.

Following me so far?

Here’s the kicker. To stay within the rules of a 529 plan, ALL of that money needs to be used on qualified educational expenses like tuition & fees, room & board, and books. These funds cannot be used for ancillary costs like travel to and from school or college applications.

So what happens if the child you’re saving for DOESN’T use all (or any) of the money in their 529 account? The cost effective option is to change the beneficiary to a qualified family member.

  • Spouse
  • Son, daughter, stepchild, foster child, adopted child or a descendent
  • Son-in-law, daughter-in-law
  • Siblings or step-siblings
  • Brother-in-law, sister-in-law
  • Father-in-law, mother-in-law
  • Father or mother or ancestor of either, stepmother, stepfather
  • Aunt, uncle or their spouse
  • Niece, nephew or their spouse
  • First cousin or their spouse

But what if you have funds left over and you don’t want to pay for someone else’s educational expenses? You should be able to get your money back, right?

Wrong. Kind of...

If you take out money from a 529 plan for anything that’s not a qualified educational expense you will have to pay a 10% penalty plus tax on the gains. That’s whack.

The double tax benefit of growing tax-deferred and spending the gains tax-free are great IF you can predict within a certain degree of accuracy how much money a higher education is going to cost for the person you’re saving for.

So I have to decide today… Do I save as if Luna is going to become a Doctor and stay in school until she’s 30?

Or should I bank on her acing all her AP tests in high school, taking summer credits at community college, and graduating with a business degree from an in-state school in 3 years?

The difference in cost would be stark. Then there’s also the chance that she doesn’t go to college at all. Which leads me to alternative number 2.

Custodial Roth IRA

The Roth Individual Retirement Account was introduced as part of the Taxpayer Relief Act of 1997 and is named after Senator William Roth.

It’s a variant of the Traditional IRA. The main difference between the two IRAs is how they are treated in regards to taxation.

Traditional IRA: Contributions are made with pre-tax dollars. Since you don’t pay tax on the money going in, you pay taxes when the money comes out.

Roth IRA: Contributions are made with post-tax dollars. Since you already paid taxes on the money going in, you do not pay taxes when the money comes out.

Both the Traditional and Roth IRA require you to wait until you’re 59.5 years old to make a withdrawal without incurring a 10% penalty.

However, the Roth IRA has a slight edge in the withdrawal category because it allows you take out contributions anytime you want without penalty.

So if you contribute $6,000 per year to a Roth IRA for 18 years, you can take $108,000 out tax and penalty free. As long as you leave the gains in the account, you’re fine.

The major obstacle to the Roth IRA, for our specific purposes, is that all contributions need to be made with earned income by the owner of the account.

So I can open a Custodial Roth IRA for Luna because she’s younger than 18 years old, but I can’t contribute my earned income to her account.

Luna needs to contribute her own earned income. But it’ll be a long time before Luna can start serving ice cream at the local dairy, fold clothes at Zara, or wait tables at Woodstack Pizza.

And we all know the first rule to investing: Time in the market is better than timing the market.

We can’t waste time, investments need to be made ASAP. So what could a resourceful father like myself do?

Less than a week after Luna was born, I called my CPA and asked her if I could put Luna on the payroll.

I said, “I’ll pay her just enough to make the maximum Roth IRA contribution..”

My accountant started laughing at me. “What’s the business reason to hire a newborn other than she’s your daughter?”

I replied, “I don’t know. How do other people do it?”

She said, “Just be normal and open a 529 Savings Plan”, and hung up.

Definitely a setback. Usually, my CPA is accommodating when I ask her to exploit a loophole for me.

I was surprised she didn’t concur.


Then I did what I usually do when I’m stumped. Google it!

I read a couple articles and watched a few videos about how people open Custodial Roth IRAs for their children when they’re newborns. All it takes is a side-gig.

  • Got a website? Post their picture on the about page. Pay them for it.
  • Got a business card? Put their picture on the back. Pay them for it.
  • Got a weekly newsletter? Include a picture of your child in every email. Pay them for it.

Ok, now things are starting to fall into place.

But I couldn’t start and stop there. What if Luna gets audited? Those IRS agents love to feast on the little guy. Or in this case, the little baby girl.

Did You Know: Taxpayers that earn less than $25,000 annually, have an audit rate of 0.69% — more than 50% higher than the overall audit rate.

I had to make it official. So I Googled: “Modeling Contract Template”.

Lo and behold, Rocket Lawyer has a fill in the blank Modeling Contract Template on their website.

So I signed up for a free trial, filled in the blanks, signed as the vendor, asked Dia to sign as the parent/guardian, and hired Luna as a model at the steep rate of $125/week.

$125/week comes out to just over $6,000 per year: the Roth IRA maximum contribution.

Click here if you want to see the contract. It’s pretty rudimentary, as far as contracts go, but it should get the job done.

Why Go Through All This Trouble?

First of all, it wasn't that much trouble to set this up.

Outside of the few hours of research and scheming, it took me less than 30 minutes to create the modeling contract and open the Custodial Roth IRA Account with Fidelity.

The real trouble is my anxiety about giving Luna a head start.

On one hand, I want to do for her what my parents did for me. On the other hand, I can’t help but wonder if I’m making it too easy for her.

The money in this custodial account will be under her complete control when she turns 18. Afterall, she did earn it!

But I’m worried.

I remember what it was like to be 18. If my parents handed me $200,000 and said “this is for your education”, half of it would disappear the summer before I got to college.

Another concern I have is, are we enabling her to be entitled? Will she think she’s better than others because of this head start? Will she come to expect these types of handouts in life?

Or will she be grateful? Will she feel lucky? Will she actually use the money for an education (formal or otherwise)?

I guess we’ll find out.

The only thing Dia and I can do is control what we can control. We want to pay for our children’s education and that requires making a decision, commitment, and investment today.

Over the next 18 years, we’ll have to tactfully prepare Luna for the moment we tell her there’s no need to worry about what her education costs.

How she reacts to that information will be a direct result of our parenting skills.

I really hope we don’t fuck this up.