The education funding account most parents ignore
College costs are approaching $80,000 annually at top private schools, yet most parents either don't save at all or use regular investment accounts that get taxed along the way. There's a better approach that grows your money tax-free and keeps more dollars available for tuition.
529 education savings plans are one of the few investments where you can contribute after-tax dollars, watch them grow completely tax-free, and withdraw everything tax-free for qualified education expenses. Plus, recent legislation makes them even more flexible than before.
If you're planning to fund any education costs from kindergarten through graduate school - 529s deserve serious consideration.
Why 529 plans are uniquely powerful
Tax-free growth and withdrawals Your contributions grow without annual tax drag, and qualified withdrawals are completely tax-free at both federal and state levels.
High contribution limits Most states allow $300,000+ in lifetime contributions per beneficiary—enough to fund even the most expensive education paths.
Flexible beneficiaries You can change beneficiaries to siblings, children, or other qualified family members if plans change.
Minimal financial aid impact 529s are treated as parent assets for FAFSA purposes, which means lower impact on aid eligibility compared to student-owned accounts.
Estate planning benefits Contributions remove assets from your taxable estate while allowing you to maintain control of the funds.
The new flexibility game-changer
Starting in 2024, you can convert unused 529 funds to Roth IRAs for your child. This addresses the biggest concern parents have: "What if my kid doesn't go to college or gets scholarships?"
The conversion rules:
- Up to $35,000 can be converted from 529 to Roth IRA
- The 529 must have been open for 15+ years
- Annual conversion limits apply based on IRA contribution limits
- No taxes or penalties on the conversion
This means 529 over-funding is no longer a major risk. Unused education funds become tax-free retirement savings for your child.
How much should you contribute?
A reasonable target: Aim to fund roughly 3 years of private college costs (currently about $210,000 or $70,000 annually). This provides a solid foundation whether your child attends an expensive private school, a less costly public university, or receives scholarships.
Contribution strategies:
- Early and consistent: Start when kids are young and contribute regularly
- Lump sums: Use bonuses, tax refunds, or windfalls to accelerate funding
- Gift coordination: Ask grandparents to contribute to 529s instead of buying toys
Remember: You can always adjust beneficiaries between siblings if one child needs less funding than another.
State tax benefits matter
Many states offer tax deductions or credits for 529 contributions, which can add significant value:
Examples of state benefits:
- Some states offer full deductions for contributions
- Others provide credits or partial deductions
- A few states offer no tax benefits but have excellent investment options
Important: You don't have to use your state's plan, but you typically need to for state tax benefits. Compare investment options and fees alongside tax advantages.
What qualifies as education expenses?
K-12 expenses: Up to $10,000 annually for tuition at private elementary and secondary schools
College and graduate school:
- Tuition and fees
- Room and board (if enrolled at least half-time)
- Books and required supplies
- Computers and internet access
- Special needs equipment
Recent additions: Student loan payments and apprenticeship programs also qualify under certain conditions.
Common 529 planning mistakes
Starting too late The tax-free growth benefit requires time to compound. Starting when kids are in high school limits the advantage.
Over-contributing to the wrong child Don't assume each child needs the same amount. Academic paths and costs vary significantly.
Ignoring investment options 529 plans offer various portfolios. Choose age-based options that become more conservative as college approaches, or select your own asset allocation.
Forgetting about state benefits Missing out on state tax deductions can cost hundreds or thousands in tax savings annually.
Quick Answers: 529 questions
"What if my child doesn't go to college?" Change the beneficiary to another family member, use funds for K-12 tuition, or convert up to $35,000 to a Roth IRA for your child.
"Should I max out 529s before other investments?" Generally no. Prioritize employer 401(k) matches and your own retirement funding first, then fund 529s with surplus.
"Can I use any state's 529 plan?" Yes, but you typically only get state tax benefits from your own state's plan. Compare options based on fees, investment choices, and tax benefits.
"What happens if I withdraw money for non-education expenses?" You'll pay a 10% penalty plus income taxes on the earnings portion of the withdrawal.
Can Titan help with 529 planning?
Yes. If you're a Titan client, we can:
- Help determine optimal contribution amounts based on your overall financial plan and education goals
- Coordinate 529 funding with your broader investment and tax strategy
- Recommend appropriate state plans based on your tax situation and investment preferences
- Adjust your education funding strategy as your children's plans and costs become clearer
The goal is building education wealth efficiently without compromising your other financial priorities.
Ready to start building education wealth tax-free?
Talk to a Titan advisor to create a 529 strategy that fits your family's education goals and overall financial plan.
About Titan
Titan is a modern Registered Investment Advisor (RIA) helping high-earning professionals navigate complex money decisions. With a dedicated advisor and access to proprietary strategies and alternative investment options, we're your go-to wealth team for everything from RSUs to retirement. Learn more at www.titan.com.
