US 529 College Savings Account (Bad Account Options)

Bad might sound dramatic, but this one is a bit of a conundrum – I really don’t see any positives, but plenty of headaches. Short answer – if you’re in the UK or thinking of moving sometime and you don’t already have a 529 for your kids, don’t open one. If you’ve already got one, read on.

What are the problems with a 529?

  1. There are no UK tax advantages – it’s a taxable brokerage account. This alone isn’t a massive problem – it’s the same way with an HSA, or with the US non-recognition of an ISA. It’s annoying and requires some planning, but manageable.
  2. It might be a trust – there are a number of articles out there describing various scenarios. Some of them are potentially even advantageous, if you a) trust them and b) know how to use them. But the simple version is trusts are complicated. If you want to keep a 529 and especially if you want to use the fact that it might be a trust to your advantage, you should probably talk to a professional.
  3. Whether or not it’s a trust, you probably can’t invest in HMRC reporting funds (and it’s certainly not a “pension scheme”). I have yet to find a 529 that offers HMRC reporting funds as an option – they seem to be mostly proprietary mutual funds. That means that not only are your gains in the 529 taxable in the UK, they’re taxable as income, not capital gains. What’s the difference? A 45% max tax rate instead of 20%.
  4. Lastly, if your child is staying in the UK, UK college expenses may not be that expensive anyway, and they may be eligible for very advantageous student loans (very rough version: a 9% tax on higher income earners that gets forgiven at age 50 if they aren’t repaid by then). This gets complicated, depends on the nationality and residence of the children and parents, etc. – certainly encourage you to do some research here and understand how much you might need to save. A couple good places to start are gov.uk on student finance and UCAS on tuition fees and student loans.

Add all that together, and you’ve got a tax-disadvantaged account that’s potentially complex and trying to solve a problem that may not be that bad in the first place.

What to do about an existing 529?

I was in this situation myself, and can only speak to the options that I uncovered as I tried to figure it out. I imagine there are some other options out there, and I welcome any suggestions!

In rough order of least to most pain:

  1. Close the 529 before leaving the US. You pay capital gain tax on any gains plus a 10% penalty – that hurts, but then it’s done and you never have to think about it again.
  2. If you’re already in the UK, but are planning to go back to the US, it might be ok to just leave it open and don’t touch it. More research needed on how UK tax works here, and likely you’ll want some professional advice!
  3. If you’re already in the UK and not planning on going back to the US, you can close it and pay the piper. That’s UK tax on any gains since moving to the UK (at income tax rates and without benefit of the Capital Gains Allowance, assuming the funds aren’t HMRC reporting), US capital gains tax on any overall gains (possibly offset by Foreign Tax Credits), and the 10% US penalty. This really hurts, but then it’s done – this is what I’m in the process of doing now.
  4. Keep it and figure out the complexities of being able to actually use it when your kids go to college. I’d be interested in any stories on how this works out in practice!

Where should I save for college?

If you need to save for college at all, given the UK’s often lower fees and friendlier student loans, you’ve got a few options:

  • ISA: Either a Junior ISA, or your own ISA. Remember, there’s no penalty on withdrawals, although you will pay US tax. Junior ISA gets you an extra £9,000 annual allowance if you’re already using your £20,000 allowance, but the account becomes fully your kid’s at 18, to do with as they wish.
  • Taxable account: any kind, whether it’s a brokerage account, savings account, etc. Obviously it’s fully taxable, and what you should invest in will depend on the details, but there’s no penalty for withdrawing whenever you like (just have to pay any taxes due on gains), and you can easily change your mind and use it for something else of your choice.
  • Junior SIPP: Not for college, since you can’t access it until age 57, but if you’re trying to set your child up for the long-term future, this is an option worth exploring further.

3 thoughts on “US 529 College Savings Account (Bad Account Options)

  1. Great article, thanks. I totally agree with your assessments of the 529. Thankfully I’ve never even considered using this option (having left the US at the age of 6 myself!). I have two UK/US kids who will probably go to a UK university one day. They both have S&S ISAs with Hargreaves Lansdown in non-PFIC UK company shares only. I intend to gradually top these up until they graduate with enough money to pay for a 4-year degree including fees and living costs – just as a benchmark to aim for. I’m not sure if we’ll actually take out student loans for them, but I suspect it depends on what course they choose and what starting salary they have. I don’t really want to sell all those nice income earning shares, so I’m tempted to recommend that they draw just the income and use the ISA when they graduate as part of their long term savings/retirement plans. I’m still hoping to be able to help them in other ways (e.g. mortgage with low phantom currency gains – now there’s another subject you can cover!). I’m fully expecting that they will be so terrified of the ISA being invested in shares that they will come to me for advice before selling them! Especially as I’ll be doing their US tax forms for them… They also both have Junior SIPPs with AJ Bell. I don’t currently put any money into these and probably won’t put any more in. However, there’s enough in there that if they grow nicely for another 50 years they might be a nice retirement gift!

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    1. Thanks for the comment, and the ideas. My kids are young enough it’s hard to tell where they’ll want to go to university. For the moment, I’ve got the former 529 money earmarked for them in a US taxable brokerage account in an index fund. Totally flexible now, so we’ll see how things go, and how my own experiment in my S&S ISA goes – ISAs for them are foreseeable, but not just yet. With UK student loans what they are, I just don’t have the worry that I would in the US – my wife still has hers and is just waiting until they’re forgiven, there’s no real impact on our lives, compared to the atrocity that US student loans can be. That does remind me, I need to look into if the student loan forgiveness is a US taxable event…

      Definitely agree on the mortgage, and the phantom currency mortgage topic is on my list to do soon, maybe later this week.

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