A few minutes ago I sat down with my five (almost six!) year-old niece. I explained to her that instead of getting her a toy or clothes for Christmas, I put money into an account that she can use for college.

I’m referring to her 529 account.

A 529 account is just tax deferred savings account for educational expenses. You can open one in any state, put money in, and let that money grow until the person using the money is ready to spend it on qualified educational expenses. I set one up for her when she was two years old.

529 plan for kids

This is a much better gift than a Tickle-Me Elmo

A qualified educational expense can be anything from tuition or books to on-campus housing or a new laptop, or probably even a mind reader or whatever they have when she’s 18 years old.

Every year I sit down with my niece and tell her that she can only use this money if she goes to college. Otherwise the money is subject to a tax and a penalty, and it’s gonna go to some other kid in my family who is going to college.

She’s the cutest little thing in the whole world and everyone buys her toys and clothes; I feel like she doesn’t need any more. I even sent out an email to my whole family making them aware of the account a few years ago, suggesting they contribute to the 529 instead of buying presents. Guess how many contributed?

Only her grandma.

The lesson to learn here is that if your family is anything like mine, there will be more than enough people buying kids toys and clothes they don’t need. Why not take what you would have spent on those toys and give the kid something he or she will actually need later in life?

Plus, I’d rather be the favorite uncle when my niece is old enough to babysit my (future) kids than when she’s five years old. (Although, she was pretty excited to tell her grandma that she had $4,400 {it’s really just $440})

Have you opened or contributed to a 529 for a young relative? If not, do you plan to?