With tuition and fees at private colleges now approaching $100,000 a year, tax-advantaged 529 Savings Plans for education can make sense even for families with significant wealth that can easily afford to fund private K-12 and higher education outright.
Part of the appeal of 529s is that they can be front-loaded, with the money invested growing tax-free and then withdrawn tax-free to pay for a wide variety of education and associated costs, including: college and graduate school (most U.S. and many foreign universities qualify); up to $10,000 annually toward K-12 tuition; qualified apprenticeship programs; and up to $10,000 to repay student loans.
Maxing out 529 contributions can add up to a substantial investment over time. Say that when a child is born, a 529 Plan is front-loaded with $90,000 every five years (the current $18,000 annual gift tax exclusion per donor x 5). Contributions can be doubled — to $180,000 annually — if both spouses are contributing. In that case, $360,000 can be invested in a 529 account by the time the child is 10, not including earnings. The total maximum contribution per beneficiary for most 529 plans is between $300,000 and $500,000.
Many high-net-worth families include 529 Plans in their estate plan for the tax advantage as well as the satisfaction that comes from setting aside funds for education. We routinely advise on 529 plan selection, set up and funding. But we also counsel families who want to end or transition their 529s.
Let’s take a look at some options when the 529 beneficiary no longer needs the money for education:
***Change beneficiaries.
Many families are fortunate to have over-invested in a 529 and find themselves with a surplus balance following graduation. The 529 owner can change 529 beneficiaries as many times as they want to a qualifying family member, or even themselves or their spouse. Usually, excess 529 balances are used to fund a relative’s – often a sibling’s — education costs.
***Maintain the 529 as is, in case the beneficiary eventually needs it for education. A recent graduate, for example, may want to keep the 529 actively invested to pay for graduate school or even their future children’s education. There is no limit on how long funds can be kept in a 529 Plan.
***Transfer account ownership or account management.
The new FAFSA (Free Application for Federal Student Aid) no longer asks about grandparent college contributions, allowing grandparents to fund 529s without impacting the student’s/grandchild’s eligibility for federal student aid. For students applying for financial aid, it is likely beneficial for the grandparent to hold ownership of the 529 account as long as possible. Keep in mind, however, that private schools have their own financial aid form, the CSS, that may ask about grandparent contributions.
If one grandparent is finding the 529 administration and paperwork cumbersome, ownership can be transferred to their spouse. A trusted aunt or uncle can also be a good option.
If financial aid is not a concern, ownership can be transferred to the student’s parent, or even to the student to self-administer. It will be a learning experience for the student to pay for tuition and room and board directly from their 529 account and reimburse themselves for qualified education expenses (books, labs, travel). Keep in mind that if a student, their parent, or a legal guardian owns a 529, access to financial aid in the form of grants or loans will be negatively impacted.
For easier administration, many 529 plans now allow adding a financial advisor with Limited Power of Attorney. This enables your advisor to assist in administering the account, from investment allocation to reimbursement requests.
***Rollover up to $35,000 into a Roth IRA for the benefit of the original 529 beneficiary (allowed under the Secure 2.0 Act).
This is a great way to kickstart a Roth IRA for the beneficiary if they have earned income of their own, perhaps from a first job or other source, and can open and fund a Roth IRA in their name. However, stipulations apply: The 529 must have been open for at least 15 years prior to the first Roth contribution, and Roth contributions from the 529 are limited to $7,000 annually in 2024 ($8,000 for those age 50+). This process can be repeated annually until the $35,000 lifetime limit is reached.
***Rollover up to $18,000 annually ($100,000 max) into a 529 ABLE Plan.
529 ABLE Plans are savings plans for people with disabilities. This might be useful for beneficiaries with special needs who might also have assets in a Special Needs Trust. A 529 ABLE account can be funded with up to $100,000 total and not disqualify the recipient from government assistance; withdrawals can be used to pay for living expenses, healthcare and other needs.
***Withdraw some or all of the 529 funds, paying tax and a 10% penalty on income and capital gains. Only the earnings in the account will be taxed and levied a 10% penalty. If the 529 assets will not be needed for school, the after-tax yields from the account can be a great way to support a down-payment, business investment, or other capital investment in the original beneficiary’s life.
Also keep in mind that in certain circumstances, the 10% withdrawal penalty can be waived: If the beneficiary attends a U.S. military academy or receives one or more tax-free scholarships (in that case, you can withdraw up to the scholarship amount for non-education expenses) or if the beneficiary becomes disabled or dies.
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How 529 College Savings Plans Work: 529s are tax-advantaged investment accounts with limited investment options, usually consisting of balanced index funds targeting a specific enrollment year. They are not guaranteed to cover tuition and fees. Tax-free withdrawals can be used to pay for a variety of education expenses in addition to tuition, and total contribution limits often exceed $300,000 per beneficiary. You can invest in the 529 Savings Plan of any state that offers them (does not have to be the state you reside in), and there are major differences in how these plans operate. It is important to compare fees, investment options and performance. A great resource for that is www.collegesavings.com. Morningstar also offers 529 plan info and comparisons at: https://www.morningstar.com/529-plans.
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