Why David Blanchett Avoids 529s

"I'm a fan of rules of thumb. Well, I'm a fan of some rules of thumb, not all of them, but I think that 529 can be an incredibly powerful way to set money aside for college. … Because if you can do it for 10 or 15 years, you're going to have this compounded growth that is effectively tax free. That's pretty amazing," he said.

"But you know, for a lot of reasons they're not going to make sense for different people. And so the thing that I say is in some sense we are really still saving for college. We're setting aside a lot of money that could be used for college, right. But it might not be. And so what we've created with this taxable account is this more optionality," Blanchett said.

The investing expert explained that putting their savings into taxable accounts made sense for him and his wife, Sarah, based on circumstances that included $400,000 in school loans, now paid off, and Sarah's goal to potentially open a veterinary practice.

"The most important thing is saving money to accomplish financial goals, right? So you could argue that college is a financial goal. You could argue that retirement is a huge financial goal. You can have other goals too, right?" he said.

"And so what the government has done is it has encouraged people to put money aside for certain things by giving them tax advantages," with 401(k) and 529 plans key examples.

With the college plans, money grows tax-free if used for qualified education expenses, he noted.

Competing Financial Goals

The 529 plans are "a really powerful way to save money for someone who, for example, is saving all they can in their 401(k)s and they don't necessarily have any other kind of financial goals on the immediate horizon," Blanchett said.

"My wife and I are a bit, we're a bit different in that we couldn't start saving when our children were young because my wife was actually in veterinary school," or just finishing, when their eldest child was born about 13 years ago.

They had the substantial student loan debt from their grad schools at the time.

The couple's top priority was paying off the loans, which they did aggressively. The couple then wondered about college savings for their children and decided that while they would love to do that, there was a good chance that Sarah would start a veterinary practice and perhaps buy her own building.

Rather than saving college money in a 529 and potentially taking on significant loans at aggressive rates for other goals, "we decided that we would kind of just set that money aside in a taxable account," he said.

While 529s offer great tax-free growth, Blanchett said that he and his wife couldn't have put much into a college account until two or three years ago. That left a shorter time period until their oldest child goes to college than the 20 years until the couple's retirement, plus a possible 30 years in retirement.

"That's like a 50-year horizon. So that's a really long time for money to grow in a tax-advantaged account. Realistically, in the 529, maybe it would have had five or six or seven years for my oldest daughter before she started school, possibly a little longer," he said.

"People have asked me a lot about this now, I say … we're not necessarily not going to do 529s, but what we want to do first is make sure we have enough money set aside so that if my wife wants to buy a building, start a practice, whatever it is, we can do that with as little loans as possible," Blanchett said.

An Earlier Saving Start

His identical twin's circumstances are different. Blanchett's brother and sister-in-law are both W2 employees, whereas Sarah Blanchett may start a business. They have different expenses, he said. And his twin has been able to start saving when his children are younger, "so they're going to benefit more from the effects of the compounding."

"Then finally, they're going to send their kids to probably a relatively expensive private middle school and high school, and so they have kind of this optionality to use the money for more than just college," Blanchett said.

He noted that 529 spending options have become more flexible in recent years.

The amount that people save toward their goals is the most important determinant of how much they'll have to meet them, he said. Blanchett and his wife thought it made a lot more sense to keep their savings in a taxable account.

Choices at College Time

He also sees a benefit to children contributing to their college expenses. Blanchett wants his children to go to good schools, but "how much better and how much more expensive are they" than the University of Kentucky, the state school where he lives, and will it be worth the extra expense, he wonders. That, he says, is an adult conversation for parents and children.

He might say, "'Hey, you know, we'll pay for what the state university might cost. Anything beyond that will involve some kind of cost sharing that maybe we'll cover more of based upon how well you do in school.'"

Blanchett's eldest child is in middle school and read the Wall Street Journal story. He told her, "'Let's be very clear here. We want you to go to college. We also want you to understand that college is very expensive and that we're going to have to make important choices about the schools you might want to attend based upon what's best for you,"' he said.

"College is insanely expensive these days and it's becoming more insanely expensive. And I don't want to give my kids a blank check and say, 'Hey, pick wherever you want to go.' They need to understand some of the trade-offs here. … There's a lot of schools that, for example, aren't better than Kentucky, right, that cost two or three times as much," Blanchett said.

The portfolio manager said he would rather help his children financially with grad school when they've decided what they want to do with their careers.

"Who knows what college will be like 10 or 15 years from now? I think that people, when they graduate high school, could benefit from going to college," but other paths exist that don't require such a financial commitment, Blanchett said.

While 529s can fund trade school tuition, the expense is nowhere near what a four-year college can cost, he noted.

'Very Conscious Approach'

Meanwhile, Blanchett considers his and his wife's aggressive retirement saving a benefit for their children, comparing it to the airline instructions for parents to put on their own air mask in an emergency before tending to their children.

"One thing that I think we've always wanted to do for our kids is really ensure that we're as financially stable as we can possibly be before we really aggressively think about how much can we save for our kids to go to college," Blanchett said.

"I think that a lot of people want to help their children, but if you're not careful, you're going to potentially put your kids in a situation where they have to help you when it comes to funding your retirement," he explained. It's "a very, very conscious approach towards ensuring that we're in a really good financial situation. And ideally, what that allows us to do then is to help our kids if they need it.

"But worst-case scenario they can take out student loans and they can be responsible for their education. We just don't want to burden them with our situation should kind of things go awry financially."

(Shown in photo: David Blanchett)