Download Financial Planning & 529’s
Why 529 Investment Accounts Are Such Great Options For Funding Future Education Expenses
A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle designed to encourage saving for the education expenses of a designated beneficiary (a minor or adult student). The funds can be used for qualified education expenses at all forms of college, as well as trade schools and K–12 private school tuition, and even apprenticeship programs. Parents and grandparents often establish these accounts to start saving early for offspring and enjoy compounding investment gains to pay for the hefty education bills anticipated. As with many investment vehicles, these plans favor clients with financial security who can set aside money for future needs and can withstand the volatility and risk of participating in investment markets.
The most significant feature of a 529 plan is the opportunity for tax-free growth. Unlike an IRA retirement account, which offers tax-deferred withdrawals, 529 plan withdrawals for qualified expenses are tax-free. You fund the account with post-tax dollars. However, if you follow certain rules, you can keep all the investment gains tax-free. That is why investing early and fairly aggressively is favored in these accounts, because you get to keep the gains with no tax consequences; conservative investments in cash effectively negate the strongest use-cases for these accounts.
So what are the rules? There’s a 10% penalty on investment gains if you withdraw funds for non-qualified expenses, and you will also face taxes on those gains. The student must be enrolled at least half-time. Tax-free funds may be withdrawn for qualified expenses at an approved institution, which includes some international universities. Qualified expenses include tuition, some fees, text books, as well as room and board expenses up to allowable limits determined by the college. You have to withdraw the funds in the calendar year that the expenses were paid, so some recordkeeping is necessary. K-12 withdrawals are limited to $10,000 per year, only good for tuition. Accounts do not need to be closed at any specific age, and beneficiaries can easily be changed to a sibling or other qualifying family member, allowing unused funds to support another student’s education or be preserved for future generations.
What complications exist?
Some folks decide that these accounts are not for them. Some don’t have enough time until the school years begin to really benefit relative to the investment risk. Some don’t think the student will attend college or might study abroad at a university not covered. If you think your student will enjoy sizable grants or scholarships – either merit or need-based – then you can withdraw the funds without the 10% penalty, but you’ll pay taxes on the gains. In some cases, 529 funds can be counted in FAFSA student aid calculations, so you might qualify for less grants or loans if you have a hefty 529 balance upon application. If you gift beyond the annual IRS gift tax exclusion limit (or 5x that amount, if you superfund a plan), there will be tax forms to fill out and you will reduce your lifetime gift and estate tax exemption. Lastly, there’s no guarantee that the account maintains the value you invested. Like all investment accounts, the account can lose value, and in that case, you’ll not only miss out on tax savings, but you’ll also be less prepared for the bills.
Any extra perks?
There are many. Some states offer annual state deductions (without itemizing) for contributions made to a 529 plan managed by the grantor’s state of residence. You can use a 529 to pay off a beneficiary’s student loans as a qualified expense, up to a $10,000 lifetime cap. It’s also possible to superfund a 529 plan, all at once, to really jumpstart the account with 5 times the IRS gift tax exclusion limit ($19,000 in 2025) per grantor. For a couple seeking estate planning transfers of wealth, that could mean up to $190,000 of contributions per beneficiary that immediately starts growing tax-free. Finally, excess 529 funds after a student has completed education may be eligible for up to a $35,000 lifetime cap rollover to a Roth IRA, subject to Roth IRA contribution rules and 529 account age rules.
This sounds really good. How do I open an account?
It’s a very easy online process. There are two types of typical 529 accounts: Prepaid Tuition Plans and College Savings Plans. Prepaid plans are limited to attending a specific university in some states, while the college savings plans are much more common. You can open an account for each student beneficiary that you wish to. The parents or grandparents who open the account are the custodians of the account with the student designated as the beneficiary. The custodian can withdraw these funds at any point for any purpose, with penalties if the usage is non-qualified. Another person (grandparent) can become the grantor to an existing account even if they are not the custodian. Assets can be merged or transferred from one account to another, as long as the beneficiaries are related in certain ways.
The plans are all maintained by individual states with an outside reputable investment firm managing the plans and managing the investment options. To maximize the tax benefits, the first place to start is to evaluate the plan in the state the grantor lives. These investment accounts cannot be managed by an outside manager like us, so you will have to open the account yourself. You will link your checking account or send a check to fund the account.
We routinely help young professionals, parents, and grandparents open 529 accounts for themselves, their kids, and their grandkids. We would be very happy to help you with this process. We can guide you to the optimal state plan for your situation, as well as determining the right contribution amounts and prudent investment choices for your situation and goals. Please be in touch with your portfolio manager and client service team if you would like to further explore contributing to a 529 plan.
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