As a financial advisor, a common question I receive from parents and grandparents is: “What’s the best way to save for a child’s education?” While there’s no one-size-fits-all answer, a 529 plan is a good place to start the conversation.
What Is a 529 Plan?
A 529 plan is a tax-advantaged savings vehicle specifically designed to help encourage saving for future education expenses. Named after Section 529 of the Internal Revenue Code, these plans are sponsored by states or educational institutions, and they come in two main types:
Education Savings Plans (ESP): These allow you to invest in a portfolio of mutual funds or similar investments to grow your contributions over time. The funds can be used for qualified education expenses.
Prepaid Tuition Plans: These let you lock in tuition at today’s rates at participating schools. They’re less flexible and not as widely used but can still be valuable in certain situations.
The Benefits of a 529 Plan
As a financial advisor, here’s why I recommend considering 529 plans:
1. Tax Advantages
Earnings grow tax-free, and withdrawals for qualified education expenses are not subject to federal income tax—and often not state tax either.
Many states also offer state income tax deductions or credits for contributions.
2. Flexibility
Funds can be used for a range of qualified expenses:
Tuition, fees, books, and supplies
Room and board for students enrolled at least half-time
Up to $10,000 annually for K–12 tuition (per student)
Student loan repayment (up to $10,000 per beneficiary)
3. High Contribution Limits
Unlike other tax-advantaged accounts (like Roth IRAs), 529 plans allow significant contributions—often over $300,000 in total per beneficiary, depending on the state.
4. Estate Planning Benefits
A unique feature of 529 plans is the ability to "superfund" them. You can contribute up to five years’ worth of the annual gift tax exclusion—$90,000 per beneficiary in 2025 (based on a $18,000 limit)—without triggering gift taxes, if properly reported.
5. Control Stays with the Donor
Unlike custodial accounts (UGMA/UTMA), the account owner retains full control over the assets, even after the beneficiary reaches adulthood. You can also change the beneficiary to another qualifying family member if the original recipient doesn’t need the funds.
Common Misconceptions
Some people avoid 529 plans out of fear that if the beneficiary doesn’t go to college, the money is “lost.” That’s not true. If the funds aren’t used for qualified expenses, you’ll pay income tax and a 10% penalty on the earnings portion of the withdrawal—but your original contributions can always be withdrawn penalty-free.
Plus, under the SECURE 2.0 Act, starting in 2024, beneficiaries of 529 plans can roll over up to $35,000 (lifetime cap) into a Roth IRA in their name—provided the account has been open for at least 15 years. This reduces the “what if they don’t go to college?” concern.
Final Thoughts
Whether you’re a parent planning for a newborn’s education or a grandparent seeking to leave a legacy, these plans can offer tax efficiency, control, and flexibility.
As with any financial decision, it’s important to consider how a 529 plan fits into your broader financial picture. But in most cases, it is a smart step you can take toward securing a loved one’s educational future.
Together, we can work to keep you on-track toward your financial goals.
Request a consultation to learn more.
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