Using A 529 Plan For Generational Wealth Transfer Purposes

If you're a parent, you might consider starting a 529 plan for generational wealth transfer purposes in addition to paying for your child's education. Even if you are not a parent yet, you should consider opening up a 529 plan. You can open the 529 plan in your name and change the beneficiary later.

There's a decent chance the estate tax threshold will eventually come down from its current all-time high of $12.92 million per person in 2023. Further, the number of millionaires in the world is expected to continue growing.

Therefore, using a 529 plan to reduce the value of your estate may help you save on taxes. After all, who wants to pay a 40% death tax rate? It's better to help fund a loved one's education in a tax-efficient manner.

529 Plan Quick Overview

To recap, 529 plans are funded with after-tax dollars just like a Roth IRA. The money gets to grow tax-free. All money taken out—including investment gains—is tax-free as long as it is spent on qualified education expenses such as tuition, room and board, books and supplies.

If the money is used for non-educational purposes, you must pay income taxes on the growth plus a 10% penalty. Your original capital contributions are not subject to income taxes or a 10% penalty.

Let me share our original intent for our son's 529 plan. Then I'll discuss how the example might evolve for tax-efficient wealth transfer purposes. I'm convinced every parent and parent-to-be should contribute to a 529 plan.

See: Everything To Know About A 529 Education Savings Plan

A 529 Plan For Education First

When our son was born in 2017, we both superfunded his account for a total of $150,000. My mother then contributed another $56,500 over four calendar years to equal a total contribution of $206,500. Given my wife and I superfunded the account, we aren't allowed to contribute again for five year (2022).

Our 529 plan is up about 41% to $292,000. This is just enough to pay for four years of private college tuition, room, and board today. Sadly, by the time our son goes to college in 2035, four years at a private university will likely cost closer to $600,000, including room and board.

No Merit-Aid Likely, Hence Funding A 529 Plan

Given my wife and I are of average intelligence, it is unlikely our son will get much in merit scholarships. I got a $500 international merit grant for studying abroad in China. My wife also got a $500 grant, mostly because she grew up in a low-income household. Thankfully, William & Mary cost less than $5,000 a year in tuition when we attended.

Further, given we are an overrepresented minority, it is unlikely colleges will look favorably upon our children. This combination of average intelligence and overrepresentation results in us finding different ways to provide for our children.

We'll also preach the benefits of going to a less expensive public university. However, for financial planning purposes, we conservatively estimate he will attend the most expensive school possible and receive zero free money.

Below is a chart that shows $85,846 of the total 529 plan amount is considered tax-free gains. These gains can be used to pay for college or private grade school.

A 529 Plan To Transfer Wealth To The Next Generation

Given the absurd and rising cost of a college education, I never thought about using a 529 plan as a wealth transfer vehicle. We're just trying to keep up. However, given billionaires pay such a low percentage of their wealth in taxes and some billionaires have used a Roth IRA to earn millions of tax-free gains, I'm inspired.

Why can't average people also take full advantage of tax-advantageous financial vehicles? We should and we can!

Here's an imperfect example of how a 529 plan can transfer wealth in a tax-efficient manner.

529 Plan For Generational Wealth Transfer Purposes

Let's say my wife and I contribute a combined $30,000 a year for 13 years starting in 2022. If the 529 plan's fund returns 6% per annum a year, it will grow to $1,223,000 by 2035.

Once an estimated $600,000 of the 529 plan is used up for our son's college, the 529 plan's beneficiary can be changed to anybody else we like. Now, instead of starting off at a $0 balance as our son did in 2017, the new beneficiary can start with a $623,000 balance.

Let's say the new beneficiary is a newborn granddaughter. With zero contributions for 18 years and a 6% compound annual return, the $600,000 will grow to $1,778,000. At a 7% compound annual return, the ending 529 balance grows to $2,105,000.

With whatever is left over after paying for college, the beneficiary can be transferred again.

Essentially, with a 529 plan, you can create a family education endowment that could last several generations if properly managed.

529 Contribution Limits

Unfortunately, it's currently not possible for us to contribute $30,000 a year to our son's 529 plan until the year 2035. Once a 529 plan hits a certain amount, contributions are no longer allowed.

Limits vary by state, ranging from $235,000 to $529,000. Where we live in California, the limit is $529,000.

This amount represents what the state believes to be the full cost of attending an expensive school and graduate school, including textbooks and room and board. The limits should go up over time to account for inflation.

Your 529 plan can certainly grow beyond your state's limit. However, you just can't contribute any more money to them once that limit is reached.

We could probably contribute $30,000 a year for five years until our son's 529 reaches the $529,000 limit. This assumes a 6% compound annual growth rate from the plan's current $292,000 value.

One loophole around this 529 limit for contribution is to create multiple 529 plans. There is no limit to the number of 529 plans you can have.

If you are blessed to live long enough to have 10 grandchildren, you can open up a 529 plan for each grandchild. Or, you can open up multiple 529 plans for all your school-age relatives.

Finally, you are allowed to open a 529 plan for an unborn child. The beneficiary just has to be living. Once the child is born, you can then change the beneficiary.

Open Multiple 529 Plans To Reduct Your Estate's Value

Let's say President Biden ends up lowering the estate tax threshold to $5 million per person and $10 million per couple. When you and your wife pass, your estate is worth $12 million. As a result, your estate will face a ~40% tax bill on $2 million. That amount equals ~$800,000.

Instead of paying an $800,000 tax bill, open up ten 529 plans for your 10 grandchildren. Then superfund each of them $150,000 to reduce your estate's value by $1.5 million. This will save your estate about $600,000 in taxes.

To get your estate down to $10 million and pay no estate taxes, you and your wife can then spend $500,000 on one big massive family vacation.

It's not hard to spend $100,000 a month on a nice beachfront property rental in Hawaii. The YOLO Economy is here to stay. You might as well live it up in your golden years with so much money.

Alternatively, you could superfund another six 529 plans for your nieces and nephews who always wrote hand-written thank you notes after each birthday. Therefore, if you have a rich uncle or aunt, you should really consider developing a closer relationship with them. You might even want to send them this post!

How Much A 529 Plan Reduces Your Estate's Value

One thing to realize is that not only do your 529 plan contributions reduce your estate's value, your 529 plan returns must also be included when estimating your estate's value reduction.

For example, let's say we contribute $30,000 a year to our son's 529 plan until it reaches $529,000. It then grows for the next 10 years with zero contributions at a 6% compound annual growth rate. The 529 balance will grow to $947,000. Out of the $947,000, $356,500 is capital contribution.

To only use $356,500 to calculate how much our estate's value will decline is incorrect. Instead, we must model in an estate value reduction of $947,000. With this proper figure in mind, we can then make proper adjustments to our investments and spending.

If we did not invest $356,500 in a target date fund over a 10-year period, we probably would have invested $356,500 in various investments that would hopefully generate between 5% – 8% a year.

My mother may have likely done the same with her $56,500. At this stage in our financial lives, we like to invest mostly in hard assets for steady single-digit returns.

If your estate is over the estate tax threshold or is on track to breach the estate tax threshold, then opening up many 529 plans and contributing as much as possible to each is a smart move.

Using A 529 Plan Beyond Paying For College

Not only can a 529 plan pay for qualified college expenses, it can now be used to pay up to $10,000 in student debt. Depending on the resource you check, the average student loan debt is between $17,000 – $38,000.

Further, you can use 529s to pay up to $10,000 a year toward private elementary or high schools. In addition, you can use a variant of a 529 plan to pay for the education expenses of special-needs students.

So long as you're taking a class to further your education, a 529 plan can be used to pay for such expenses. Cooking classes, language classes, and music classes from accredited institutions all qualify for 529 payments.

There is even a special exception if your child is awarded a college scholarship. In that instance, the child may take out money equivalent to the scholarship amount from the 529 without triggering the 10% penalty, but he or she would owe taxes on gains.

Finally, you can use a 529 plan to pay for a Master's degree or PhD.

New 529 Plan Rollover Rules Due To Passage Of Secure 2.0 Act

Before the Secure 2.0 Act was passed, families were hesitant to open or further fund 529 plans out of fear the leftover funds would be trapped unless they take a non-qualified withdrawal and assume a penalty.

Money withdrawn from a 529 plan must use for qualified educational expenses. If not, you’ll pay ordinary state and federal income taxes (at the beneficiary’s tax rate) on the money, as well as a 10% penalty. 

Now, the penalty can be waived if your kid wins a scholarship, gets into one of the U.S. military academies, receives support from an employer or for several other reasons – but that’s just the 10% penalty. You’ll still need to pay the tax bill.

Conditions Of Rolling Over 529 Into A Roth IRA

With the passage of the Secure 2.0 Act, you can rollover left over 529 funds into a Roth IRA account. First is that the amount rolled over can’t be more than the Roth contribution limit, which is $6,500 this year. You also can’t roll over more than $35,000 total in the beneficiary’s lifetime. You also can’t roll over contributions or earnings from the past five years.

Another condition is that the 529 plan must have been open for at least 15 years. Experts are unsure whether changing the account beneficiary requires a new 15-year waiting period.

However, the rollover 529 plan contributions aren’t subject to the Roth IRA income limits of $153,000 for single filers and $228,000 for joint filers this year.

The more Congress expands the options for how to use a 529 plan, the more valuable a 529 plan becomes. n in the future.

Related: Recommended 529 Amounts By Child's Age – A Guide

A 529 Plan For Noneducation Expenses

Just like with a Roth IRA, withdrawing capital contributions to a 529 plan do not face a 10% penalty. Contributions were already made with after-tax dollars. Therefore, if you find yourself in an emergency, you can easily tap your 529 plan contributions if needed.

See the post: 529 Plan Or Roth IRA to pay for college.

If you need more capital than just your contributions, then you must pay taxes on the gains plus a 10% penalty. Although a 10% penalty is unfortunate, hopefully, the years of compounding will help offset this pain. Please double check if you can only withdraw capital contributions!

If you find yourself out of a job and need funds, withdrawing from a 529 plan while you're in a low tax bracket can make sense. If your child decides not to go to college or ends up getting a full ride, you could withdraw from your 529 plan after you retire. Presumably, you will be in a lower tax bracket.

Just beware that some states include additional penalties when withdrawing 529 funds for non-educational purposes. For example, California imposes an additional 2.5% state income tax penalty on the earnings portion of non-qualified 529 plan distributions.

Related: Legitimate Reasons To Withdraw From A 401(k) Or IRA

Exceptions To The 529 Plan Withdrawal Penalty

There are situations in which the 10% penalty is waived for non-qualified 529 plan distributions. However, the earnings portion of the distribution is still subject to income tax. That said, if you are in such a dire situation, then you will probably be in a low tax bracket.

  • A beneficiary dies or becomes disabled
  • A beneficiary receives a tax-free scholarship
  • Beneficiary receives educational assistance through a qualifying employer program
  • Beneficiary attends a U.S. Military Academy
  • The qualified education expenses were used to generate the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC)

How Much To Contribute To A 529 Plan

Obviously, the more you use your 529 plan, the less you will have to transfer wealth to the next generation in a tax-efficient manner. Therefore, you've got to continuously make calculations regarding your estate's ultimate value upon death, your child's educational interests, and the future cost of education.

It is impossible to get all the variables right. However, with the right amount of planning, you can certainly reduce your estate's tax liability upon death.

If you find your estate to be way above the estate tax threshold already, then you can be fairly certain that every dollar you contribute to a 529 plan reduces your estate tax by 40 cents.

For generational wealth transfer purposes, here's the roadmap:

  • Contribute to the maximum 529 plan limit
  • Hope your 529 plan grows faster than the cost of education cost
  • Create a workhorse genius child who gets a lot of grant money to reduce your forecasted cost of education
  • Change beneficiaries or list backup beneficiaries once your child is finished with their education

Using a 529 plan for generational wealth transfer purposes is smart if your estate is large. Even if your estate is forecasted to be below the estate tax threshold, tax-free growth is great.

Over time, I've come to realize that having generational wealth is one solution to lessening the anxiety all parents experience with having children. Accumulate so much wealth it doesn't matter if your kids get rejected from great colleges and denied well-paying jobs. Obviously, accumulating great sums of wealth is easier said than done.

Related: Open Up A Roth IRA For Your Children

Education Is Key To Financial Freedom

After graduating from college, I told myself I'd never go back! Then after getting my MBA, I finally started to appreciate education more. Today, I believe a great education is the foundation for achieving financial freedom. And once you achieve financial freedom, you can easily take more steps to live your ideal life.

I'm now focused on building our children's 529 plans until the maximum limit. With two children or more, it's easy to miss a year or forget to contribute the maximum gift tax limit. Therefore, make sure you stay on the ball.

I view having a 529 plan as a key weapon to combat egregious college tuition inflation. A robust 529 plan is also a good hedge against misfortune. Just know that having a 529 plan in the parents name counts against you when applying for good financial aid.

At the end of the day, one of a parent's key responsibilities is to provide their children a solid education. Taking things a step further by creating generational wealth with a 529 plan is another benefit. It means you've adopted a Legacy Retirement Philosophy to help your descendants succeed.

Invest In Private Growth Companies

In addition to investing in your children's 529 plans, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI! Invest in private growth companies today could have huge returns by the time your kids graduate from college.

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

Recommendation For Your Family

Get affordable term life insurance to protect your family. The easiest way to check the best rates is to visit PolicyGenius. After you fill out your needs, you'll get competitive quotes from qualified carriers. PolicyGenius shines a light on the opaque life insurance pricing practice so you can save.

Both my wife and I got great life insurance policies with PolicyGenius. My wife doubled her coverage amount for less. Meanwhile I was able to get a new 20-year term policy during the pandemic. This was huge given we have two kids under five.

For more nuanced personal finance content, join 60,000+ others and sign up for the free Financial Samurai newsletter. I've been writing about personal finance since 2009. Using A 529 Plan For Generational Wealth Transfer Purposes is a Financial Samurai original post.

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87 thoughts on “Using A 529 Plan For Generational Wealth Transfer Purposes”

  1. My main problem with 529s is you are funding a ridiculously overpriced item (undergrad) that’s simultaneously decreasing in value (less focus on knowledge, more on being woke) while the alternative (knowledge via online) has never been more valuable AND FREE. College may have been the ticket to a nice lifestyle decades ago, but i don’t think that is true today and even less likely in the future.

    If college costs $50k/yr today, and grows at 5% a year while inflation grows at 2%, in 18 years, that’s $85k/year in todays dollars, or roughly $350k for a 4 year degree, which combined with both not making income for 4 years, and a higher tax bracket while working, means you basically get zero value out of college education on average – and that’s if the kid finishes – over 50% do not. Put another way, college has negative NPV even if you believe it adds a million to your income over your career – even without discounting time value of money (hint it doesn’t add a million in income as it doesn’t account for selection bias).

    I have no problems saying 90% of kids today would be better off spending 3-6 months reading this site start to finish, along with a few other personal finance blogs (all free!), and then shadow someone to learn a trade. There is more knowledge available for free online by a factor of 1000 than what kids will learn at a college today.

    Yes, there are graduate programs out there that are worthwhile, but only a small % of the population goes to grad school and even fewer actually receive a masters in anything worthwhile. If you think your kid may go that route, then just do the cheapest college they can get with good grades and then do a worthwhile masters program – thats pretty close to what I did as an adult while working and it paid off. My undergrad I received (BS in Econ with perfect GPA) was worthless in my mid 20s from what I’d already learned from working – and getting paid to do so. My T15 MBA was valuable, however. I think more parents would be better off saving for an affordable place to live for their kid than college.

    1. You’re preaching to the choir. See: Would You Accept $1 Million Instead To Go To Public School and What If You Go To Harvard And End Up A Nobody. My belief is that the use of 529 plans will change as education changes in the future.

      Reading personal finance blogs for free is great. I’m all for it. So is reading great books.

      Regarding saving for an affordable place to live for their kid, I’m with you too. See: Three White Tenants, One Asian Landlord: A Story Of Opportunity

      Let’s provide Education + Shelter + Health + Love to our children. The amount of each is up to the individual.

  2. Some states like Colorado let you deduct your contribution from state taxes as well.
    That’s an amazing savings.

  3. Great article. The one area I’m not clear is on the process for generational skipping. The IRS has rules specifically about this to limit your ability to superfund and then keep it in a 529 growing tax free benefiting your child and then their child (i.e., my wife owns the account and the beneficiary is our child, you are not allowed to change the beneficiary to one generation lower).

    How do you think about getting around that? I can see withdrawing putting the to a beneficiary with low taxes and withdrawing it and then even setting up a new one… other ideas?

  4. I have more of a question than a comment since I respect the commentary so much in this forum. I have been saving for my son’s future college expenses in a 529 since he has been an infant. I have some nice gains, and since he is now going to be a senior, he will be off to college soon. I have recently placed the money in a bank deposit portfolio in the plan. It is basically earning nothing, but I am so worried we could have a market downturn, and I don’t want to lose any gains. I also am concerned with the one year left in high school, and four years of college; I should be making more with the funds. What is your investment advice at this stage?

  5. I absolutely agree. Since our state offers a small state tax credit, I opted to contribute $15k per year rather than a lump sum at the beginning, which at the time would have been hard anyway. My 9-year old’s 529 balance is already more growth than actual contributions. My plan is to do a lump sum in each of my kids’ 529 accounts the year I decide to retire. It may end up overfunded, but the extra money could be used for private high school, graduate school, or grandchildren, all of which are great outcomes!

    1. Great job! Yes, I don’t think we should worry about over funding our 529 plans anymore. If there’s money left over, what a gift to think of others or go get more education.

      There’s literally an endless number of things we can all learn. All of us or just scratching the surface.

  6. Sam,

    This post on 529 plans is a great concept, but I would challenge you to take it further. Rather than waiting until a child is conceived and still unborn, those who know they will be future parents should start funding their own 529 plan today.

    With 529 plans, they can be opened for oneself as the beneficiary. By doing this, you can pay for the educational expenses that you already incurred with student loans up to $10,000 and for any future retraining, as the job market has moved in the direction of demanding new skills.

    By doing this, high-income earners, especially on the West and East coasts, now have an additional place to save after maxing out their 401(k), IRA, and HSA accounts. For whatever funds you do not use on yourself by their birth, you now can transfer the plan to their name by changing the beneficiary; this is a powerful tool for those who know they will have kids.

    The benefits of this are greatly magnified for a couple that is made up of two high-income earners, as they both can start this strategy right away. Whenever RSU awards vest or large bonuses are received, 529 plans will be a great place to put these new funds for couples that are not trying to retire in the immediate future. Additionally, the preferential tax treatment on gains and the deduction of contributed amounts on the state income tax level in some places only further enhance this strategy.

    Olaf, the Mile High Finance Guy

    1. I agree! Say so in the second sentence of this post.

      “ Even if you are not a parent yet, you should consider opening up a 529 plan.”

      But perhaps I should emphasize this more, especially for adults who really want children at some point.

      I’d love to know more about how you set up your 529 plans wand what you plan to do with the money at various stages.


      1. Sam,

        Alas, I see that now; recapping it later on certainly would be helpful.

        I currently have my 529 plan set up with myself as the director and the beneficiary. I am still undecided on if I will attend a graduate program at some point later in my career, as I am currently on a sabbatical and thinking that through, amongst other things.

        My spouse and I plan to have a kid within the next few years, so regardless, I have been funding my 529 plan as a backup. My 529 plan has only been contributed to once our 401(k), HSA, and IRA contributions are maximized the year.

        However, I do not fully maximize the 529 plan, as growing our standard brokerage accounts is essential at this stage in our wealth building. If we had the income to maximize these plus our own 529 plans, we most certainly would.

        Olaf, the Mile High Finance Guy

        1. Cool. Smart of you guys to fund a 529 plan years before having kids. I should have done so in 2014-2015 when we were both ready to start a family instead of in 2017. Better late than never!

          I went to grad school as well, but my employer paid for 80% of it. I suggest going the employer sponsored route. Hard to beat free, especially if you enjoy your employer.

  7. Cool idea! I have an HSA that I’ve been funding with the maximum contributions for the last few years that I am planning to use in a similar fashion, but hadn’t really considered the 529 until now. The idea that you could essentially leave education and health/medical endowments for future generations is a pretty cool legacy if you ask me!

  8. We have 2 kids ages 19 and 17 , started 529 when our kids were born . Contributed as much as financially we can squeeze , I’m a stay at home mom so we have 1 income . When our older kid was in 9th grade All moms around me gave me a nervous breakdown . We are in Cupertino CA and kids are so competitive , we hired college counselor amazing guy with creative thoughts . Our son ended up getting $8 k per year academic scholarship from Baylor university cannot get financial aid higher tax bracket . He will graduate next year finishing college in 3 years. For our younger son our counselor suggested different route . He will be graduating college in 2 years after high school. It’s totally worth every penny to hire a good college counselor . My kids are average intelligence kids . I am such a big fan of your articles , Keep on writing amazing articles.

    1. Can you define average intelligence? I’ve read that several times now and it always confuses me. I would like to know how you rate that, and compared to whom?

    2. Wow! Graduating college in two years is incredible. Where is he going to college and what does he want to do?

      I really enjoyed my time in college. It might’ve been the best of times actually.

      Congrats on raising two smart boys!

      “ When our older kid was in 9th grade All moms around me gave me a nervous breakdown . We are in Cupertino CA and kids are so competitive “

      I kind of fear this as well, and it is probably an inevitability. That’s one of the reasons why I am building a rental property portfolio and maintaining an online business in order to circumvent this inevitable anxiety in the future.

      I clearly see the merits of having a family business. I hope others can do the same thing as well.

      1. Our younger son will be applying this year , we want him to go to private school because of all the connections he can make . He wants to do double major so it might take him 3 years rather than 2.

        People always scare me with a lot of information that is most of the time not right . After hiring the college advisor we found out a lot of things and ways that are very doable for kids to distinguish themselves from others .

        So far I have learned getting a good/right advice and direction is worth every penny but mostly people pretend they know things and take your money there are very few people who really know what they are doing.

  9. We are hoping to do what you recommend. My husband and I grew up middle class and lower middle class, but have benefitted from my parents’ whose were in a position to be generous later in life.

    My parents were kind enough to “superfund” my children’s 529s when they were born (in 2003, 2005, and 2010).

    My mom hasn’t sent me a statement since 2015, and I don’t ask.

    But in 2015, the 529 accounts were worth

    $322,000 (for our child born in 2003)
    $293,000 (for our child born in 2005)
    $120,000 (for our child born in 2010)

    Our oldest child is starting college in the fall. Even the most expensive college to which he applied was $71,000 total ($54,000 for tuition and $17,000 for room and board).

    He ended up choosing one on his own that was less expensive. My mom recently paid the first college tuition bill from the 529. :-)

    Based on our experience with the college admissions process this year, it seems like there is a fair bit of merit aid available, even for students who are not at all top students. If you’re talking about Top 10 schools, then merit aid is really hard to get. (Financial aid is widely available, which is only fair. We did not fill out a FAFSA.) But if you’re willing to go to a school that’s not a Top 10 school, merit aid is definitely available. And maybe there will be cheaper virtual options in the future, as Sam as previously written about.

    So far our kids don’t express any interest in graduate school (although it’s too early to tell). And so we hope that they can use their 529s for their own children. (So far, the accounts are in my mom’s name, with my kids as the FBO’s.)

    1. Curious if you contributed anything on your own as well, or did you just bank on the bank of your parents for your kids futures?

      1. Working mom

        Hello. We are saving and investing about 30 percent of our income (two full-time workers).

        As for the 529, no, we’re not contributing more to those accounts because it seems like those amounts are plenty. We’re contributing to our kids’ futures in other ways, and hope to give them each a down payment someday, and maybe a small annual gift (less than the IRS max).

        1. Yeah makes sense. My thought is you need to look out for yourself and your own and continue be in the right position incase someone else changes their opinion about promised money. It would make me nervous to have someone else control the 529, because they could easily change beneficiary or decide that they want you to pay yourself one year and not make a payment on your behalf.

          I have a similar situation in a sense. One of my siblings is super rich and has no kids. She has made promises to help out all her nieces and nephews. I have always kept this in the back of my mind, but haven’t counted on it. So my wife and I continue to throw money into the 529 plans (we have 6 plans currently for the 2 kids, 3 each.).

          My oldest nephew just graduated and is going to be attending a relatively high cost private school this fall. I was making a comment the other day to a different sister about how it’s great he will be going to that school, but it seems expense. My above referenced sister happened to be in the room, and over heard the comment. She chimed in and said, “oh yea, it was a little pricy but I just paid for it all, so he is set.”

          So, now I’m thinking perhaps she really does intend to do the same for my kids as well. Who knows?!

          I just know I don’t want to wait until they are near college age to find out she changed her mind and gave all her money to a petting zoo. So because of that I’m still plowing in money to make sure they are covered. My goal is to hit the max for each kid, we are 1/3 of they way there now. Worst case, I’ll be way ahead for the potential grandkids is any.

          1. Working mom

            Such good points. I guess we are risking it that my mom could change her mind on not paying her grandchildren’s college tuition. Fortunately, we are a relatively close-knit family (albeit not geographically), and she seems to really be happy to be able to fund her grandchildren’s college educations. I guess there’s a 1 percent chance she could change her mind. My 3 kids are her only grandchildren, and she really enjoys their company and being a grandmother.

            Your sibling sounds quite generous! But I can see having a back-up plan in your case, since she’s the aunt and it sounds like there are several nieces and nephews to potentially fund. (At least in our case, my kids’ names are the “FBOs” on the account, but of course, my mom could change that if she wants to.

    2. Wow! For your mom to superfund your children’s 529 plans as a middle class / lower income adult is incredible. Go mom! It might be really interesting to find out how she was able to do that on her income. Did she purposefully set aside money for her grandchildren?

      It also might be good to check on her and see if she’s doing OK financially, if a large percentage of her net worth went into super funding the accounts.

      I remember showing zero interest in graduate school for the first four years until the downturn hit. Then I was all forgetting my MBA..

  10. Bitter to Richer

    I’ve been meaning to research more into ways to build generational wealth (I don’t have any kids yet, but I’m hoping to within the next few years). Is there anything else besides the 529 you recommend looking into or have another article on?

  11. Not sure how flexible other 529 plans are but the NY plan has enough options where you can get better then these low to mid single digit grow rates people are suggesting.

    I mostly invest in aggressive funds. My son’s (10 yo) 529 has had an annualized rate of return of 14.53% over the last 10 years. My daughter (6 yo) has had an annualized rate of return of 17.02% over the last 5 years. Both accounts benefited from me moving half the portfolios to income oriented funds prior to last year’s market crash and then moving back to an aggressive portfolio during the dip. The plan is to get more conservative once they hit HS. Only being able to rebalance twice a year is really restrictive though. Probably the only thing I dislike about 529 plans.

    Great article. I never thought of a 529 plan being used as a multigenerational wealth transfer tool. That’s a great idea. Similar to your recent Life Insurance article, this is something my wife and I are talking about.

    1. A 14.53% annualized rate of return over 10 years is very impressive. Well done! What type of funds does your NY plan allow you to invest in? Interesting point about only being able to rebalance twice a year. Although, twice a year is about right for me.

      I’m curious how large your son’s 529 plan has grown to after 10 years and whether you view on investing risk changes as it grows larger? What is your ultimate goal size for your son’s 529 plan?

      1. Dr. Remoulak

        Question wasn’t for me, but I started putting a fixed amount in to each of my kids funds beginning the month they were born (’06 and ’07) and each has done about 11% annualized. If I hadn’t put them in the dud target based funds the first 6-7 years and just started with the S&P index would have done 14% annualized. Dollar cost averaging, low fees, don’t try to beat the market and let time do its thing.

      2. We’ve benefited from some good decisions these past 15 months (lucky decisions is probably more appropriate). Back of the envelop, if I exclude the last year, the average annual return over the first 9 is closer to 11.5%.

        Our approach is to pay 70% of the cost of an in-state tuition using a 529 plan. The remaining 30% will come from our brokerage account and/or income as we go.

        For private schools, merit aid will be needed if they decide that route. This means elite private schools are off the table as getting merit aid from those schools is almost imposible.

        Our approach is limiting but I just can’t get behind paying more than an in-state school. In Texas, UT Austin, Dallas, Texas A&M etc are great schools. In Cali, y’all have even more options. Non name brand private schools are more generous with merit aid. You just have to target schools where your kids fall above the average stats for that school. There are too many great colleges in the US for me to want to pay the cost of these name brand schools.

        1. “ For private schools, merit aid will be needed if they decide that route. This means elite private schools are off the table as getting merit aid from those schools is almost imposible.”

          Just read the Ivy leagues provide 80% of their students aid (free money).

          It’s in the book, The Price You Pay For College by Ron Lieber.

  12. Dr. Remoulak

    Great article Sam, and glad to see you put your 529 in an index fund. I had my kids 529’s in Fidelity’s target based funds for the first few years and between the fees and performance, the results were awful. Would encourage all to reconsider and be a bit more aggressive (using the S&P index fund) at least for the first decade.

    Back to the topic at hand – great suggestion. Trick for us will be to not to let the kids know how much will be in the account so they feel some responsibility and obligation to save and invest for themselves and their kids – as you’ve said in the past, far more gratification doing it on your own and overcoming the challenges that life brings to everyone.

    1. “ Trick for us will be to not to let the kids know how much will be in the account so they feel some responsibility and obligation to save and invest for themselves and their kids”

      This is important. And if they do find out the account balance, it’s up to us to say how much will be allocated and to whom.

  13. I would rather fund a custodial brokerage account with my child. We would have more flexibility and wouldn’t be “boxed” in on just educational needs….

    What if you son decided to live at home and attend San Francisco State University? Would you able to charge 10k a month in room and board? lol…..:)

    1. Go SF State!

      I’m doing both. Whenever dilemmas like this occur, I tend to always just think, “Why not so both?!”

      And to add a custodial Roth IRA as well!

      Make them work for their money before 18. Hopefully by then they will have the work ethic to continue.

  14. Great value add article. Never ran across the strategy before. Excellent long term strategy for a family educational endowment. I only hesitate or cringe thinking someone in the government will read it too and set a term limit on funds remaining in a 529 – similar to the recent law changes that eliminated stretch IRA withdrawals from a beneficiary’s life expectancy to 10 years.Still an excellent idea.

  15. Sam,

    It be a lot cheaper to higher a foreign language tutor and send your kids to college in Europe for free.

  16. I still dont understand why someone would want to fund a 529 with ~3-5% (vs investing for higher returns in the market 8-10%+) when you are
    a) Restricted to the plan choices
    b) Restricted in terms of withdrawals
    c) Restricted in terms of what the funds can be used for
    d) Is a negative when the child tries to apply for scholarship funds

    What if the child has no aptitude, ability or interest? 18 yrs later pay a 10% penalty and withdraw ?

    Multiple CPA’s have told me its better to make an investment and designate it for educational purposes vs opening a 529 ..Do people invest in it because they are afraid they may not be as fiscally disciplined ? I get the altruistic aspect of considering it/rolling it over for yet unborn grandchildren …but is there anything preventing one from opening it when the grandchildren “actually” come into this world. I am genuinely trying to understand what am I missing by tying up ~$0.5M in an account with restrictions when there are other options ? TIA

    1. Sure, having a high 529 balance is a hedge against “low aptitude” as you write. A Low aptitude child won’t be able to get scholarships. At the same time, a high attitude child with high household income might want to go to one of the best private schools in America. The price tag will be huge.

      You can always invest in a 529 plan and in a 401(k) plan and in a taxable investment account. They are not mutually exclusive.

      Let’s say you have a $10 million net worth or $20 million net worth, having 2.5%-5% in a 529 plan to take care of your children’s education doesn’t seem like that much. Or does it?

      And if all else fails, you assign a different beneficiary to help another family member.

      What is your net worth now and the funds you have allocated towards your child’s education? I think your answers will help in determining Why you think using a 529 plan for generational wealth transfer purposes is not enticing.


      1. To add to that, many states have tax deducts as well. I used to have 4 accounts in VA for my kids – 2 each from each spouse. limit deduct is $4k per account, per beneficiary. so $16k off the taxes each year for saving money I would save anyway. In a good year of returns, save $16k off taxes, in a bad year save $16k off taxes. The best part about VA is that the money doesn’t even have to originate from the benefactor of the account. So you can still take the deduct if family or friends donate to the account. Each account has the limit of up to $4k per account, unlimited. Additionally, any amount contributed over the $4k per account can roll over indefinitely to lower future taxes long after your kids have used the money up. So, there are some state specific perks which make contributing to 529s more useful than say the market.

        Lastly, the 10% withdrawal penalty/fee as well as the income hit I think is a good thing. It makes people save for their kids future and limits the temptation of taking the money back. in the listed example of opening a penalty free market account, what prevents the donor from turning that into a lake house instead of college tuition.

        My only regret looking back was that I didn’t start on in my name to carry through my years to then switch over to my kids. Could have been working on that for years. Instead I started the month they were born.

        One last point… I think you may have more success asking friends and relatives to donate to your kids 529 plan versus your market account. Far too easy for you to move the money around, and for your friends/family to think you are just trying to get them to inflate your lifestyle rather than your kids…

    2. Kona – You are missing that there is tax-free growth with a 529 account. If you earmark another investment for educational purposes, you will need to pay Uncle Sam when you sell that investment.

  17. EB in London

    Combining thoughts on a couple article, I’ve recently transferred to London for a 2+ year assignment. So glad I did as it’s a career goal of mine also… HOWEVER we also wanted to use our superfunded 529 to pay for an INTERNATIONAL private school. This unfortunately is not permitted under the CA 529 programs (too bad it would’ve been ideal).

    We will also transfer beneficiaries to grandkids after our kids finish school (maxing the CA 549 contributions as you described) BUT not seeing that the complete ACCOUNT can be transferred versus just the beneficiary. This would limit the endowment to only what we’re alive for, not a perpetual family education machine. Did you confirm than an entire account can be transferred to children?

    1. Good to know on international private school. Would seem to violate the spirit of the law change of using $10,000 a year private grade school. I’ll check my provider.

      I don’t quite understand what you mean on the second part. Please provide an example and let us know what your 529 provider says. Thx

  18. Excellent article. I never even thought about how a 529 plan can pass down generational wealth without invoking expensive taxes. I always knew it could shift towards another child, but I never thought about the beneficiary being a future grandchild.

    I was on the fence about contributing to a 529 plan due to the restrictions of educational expenses and the 10% withdrawal penalty if it is used for something other than education. Now, I am smacking myself (figuratively) for not realizing the opportunity with this type of account.

  19. Mike @ SecondGenFinance

    This whole article is great. I love seeing all the “tricks” for transferring wealth without paying taxes for it. However, this part:

    The 529 plan is up about 41% to $292,000, or just enough to pay for four years of private college tuition, room, and board today. Sadly, by the time our son goes to college in 2035, four years at a private university will likely cost closer to $600,000, including room and board.

    You make it sound like you won’t have enough money to pay for your son when he starts college. This works under the assumption that you don’t think the market will grow faster than the costs of college. Over the past 20 years, college costs have been growing at about 4.8% while we usually track the market at about 8-9%. Using these numbers, you wouldn’t have to contribute another dime to your son’s 529, and still have plenty to pay for all of his undergraduate schooling and likely a large portion of any graduate studies.

    1. Hmm, didn’t realize I made it sound like I won’t have enough money to pay for our son’s college using a 529 plan. Thanks for the feedback.

      $292,000 can pay for 4 years right now, but he’s still got 14 years to go and there are no guarantees with returns. For example, the year after I started contributing, in 2018, his 529 plan closed down about 6.3%.

      Whereas I’m much more confident college costs will rise 4% – 6% per annum for the next 14 years. That’s almost a guarantee. Hence, one of the reasons why I’ll continue to contribute up to the limit.

      How is your 529 plan doing and when do you plan to use it?

      1. Mike @ SecondGenFinance

        Thanks for your reply.

        Our 529 for our daughter is currently at $17.5K, and she’s due to start college in 15 years. At our current contribution rate, assuming the usual 8-9% market return and the current 4.9% college cost increase, we should be on track to cover nearly all her costs assuming she goes in-state to a public school.

        It’s fascinating that you released this when you did because I literally just published my own 529 article yesterday so all the numbers were fresh in my head.

        1. Cool. That would be great if you get 8-9%. Perhaps I should change my investment allotment bc my target date fund gets majority bonds the last five years.

          Curious, if your daughter is 15 years away and has $17.5k in her 529 plan, does have $292K in a 529 plan for college 14 years away seem ridiculous?

          It’s partially why I wrote about generational wealth transfer. My wife and I have until next year to decide whether we want to contribute $30,000 a year again.

          I just don’t think our son will be wise enough to attend a public university or get free grant money, hence our conservative stands on saving money.

          1. Mike @ Second Gen Finance

            Knowing that we have 15 years to go, we’ve invested very aggressively because why not. There’s always time to recover if needed and DCA should smooth out any snags along the way.

            Honestly, the amount you posted for your son does seem a little excessive. I’ve been erring on the side of having barely enough / just under so that nothing in the 529 goes to waste. Plus, I have to make her work for it a little or she won’t appreciate it as much. But having read your article and utilizing the 529 as a wealth transfer, maybe it doesn’t hurt to have so much.

            Thanks so much for your candor and information. It’s always nice to see the ways you think of things. At the moment, the amounts of money you write about seem far away, but the information is still useful for us with slightly lower wealth amounts.

  20. Sam,

    Do you think that tuition will cost $600k in 24 years? I was thinking that tuition will actually decline at some point in the next two decades (maybe it’s wishful thinking, I don’t know) due to the rise of free education resources out there.

    I mean, tuition really is only to buy the brand name from the college, there’s only so many efficient ways to teach that 2+2 equals 4. I hope education doesn’t become like Apple where the real value is just having the ability to slap the name value in the resume and not the quality of information learned.

    Honestly, if I had to do it all over again, I would not go to college or at least take a gap year or two before figuring out whether college is the right path for me. I enjoy making money much more than having to learn for 4 years before making money!

    1. Mike @ SecondGenFinance

      Current college costs for a private institution are almost $55K. For the past 20 years, costs have been growing at about 4.8%. So, in 24 years, at the current rate, the numbers pretty spot on.

      However, to your point, I would hope that costs would stop growing as quickly too due to all the options popping up. However, I believe that costs have been going up as quickly as they have simply because demand is so high because loan money is so prevalent and cheap. If we have loan forgiveness around the corner, or free community college, etc., in the long term, I can only see costs going even higher due to the influx of demand.

      1. David @ Filled With Money

        I hope people really wake up to the breadth of alternative choices and/or community college as a viable option. I wish I had done that for 2 years before moving up.

    2. In 24 years? I would say with 90% certainly for the top 25 private universities, all-in (room, board, tuition, etc). 3% per annum growth for 24 years. $300K turns into $602,000 by 2035.

      By 2035, in 14 years, when my son may go to college, I would say with 75% certainty for the top 25 private universities all in. I’m modeling a 5% annual growth rate for the next 14 years. $300,000 today turns into $593,000 by 2035.

      I hope the madness ends since everything can be learned for free online. However, I like to be conservative. And if I’m surprised on the upside, then great.

      1. David @ Filled With Money

        LOL I botched the math. The next 14 years* not 24 years.

        I hope the madness ends too. I hope more people realize that there are so many alternatives out there.

  21. Great analysis, as always. Here’s one thought I had:

    Let’s say you save up $300,000 for a fancy private school college tuition. But, let’s say you’re also still high income. Wouldn’t it be better to pay for college outright with post-tax income and then leave the 529 account to your grandchildren? If your alternative savings vehicle is a taxable account, then you might be better off paying out of pocket and keeping the 529 growing tax-free. We could perhaps be incentivized not to even use the money we’ve saved up. Wouldn’t that be ironic?

    I like the idea of leaving my kids big 529 accounts for their kids instead of assets they can more easily liquidate. Instead of giving them a traditional inheritance of assets they might squander, give them something to pass forward to future generations of FS Jr and FS Jr Jr …

    I’m digging it. Great article.

    – DeForest

    1. “I like the idea of leaving my kids big 529 accounts for their kids instead of assets they can more easily liquidate.”

      It’s a good thought. As parents, we know the increased financial burden of raising children. Therefore, to help alleviate their burden for their unborn children is a magnanimous act. Further, it encourages our children to plan for the future and think about others as well, not just themselves.

  22. I’m also wondering if the 529 benefit can be decomposed into two components:
    1. Annual non-tax gifting (not necessarily specific to the 529)
    2. Tax-free growth (specific to the 529)

    It’s an all-in-one place to gift + grow tax free. It makes me wonder if this should be the primary path towards leaving an inheritance even. No more worrying about “overfunding” as long as you value education for your descendants.

  23. Richard Harrell


    Your observations on 529s, 401(k)s and IRAs are always interesting and thought provoking. Thanks for doing the hard work to post on them.

    There is one thing about each of those vehicles, actually two, that is restrictions and penalties. You have never impressed me as a guy who likes either restrictions or penalties. Why do you work in that environment?

    When your children want to apply to a university, you will become an expert in FAFSA. You will find in the fine print that all 529 accounts have to be reported as assets that will reduce the amount of money for which you children may be eligible. At the same time, there are a few financial vehicles that are excluded from being assets. Look this up online on the FAFSA application. The billionaires are putting their money in the non-asset FAFSA class.

    The other thing is the restriction on usage. Suppose your son wants to become a fire jumper and not go to college. What will happen to the money in the 529 account? It is restricted usage and must pay for college. Any other use of that account will result in taxes and penalties.

    The billionaires put their money in financial vehicles that are not restricted and have no penalties. I would be interested in knowing more about where they put their money.

    1. If in 14 years I have to rely on FAFSA to get financial aid, I think I will have failed as a Financial Samurai. I will also be taking away financial aid from other families who deserve it more than we do.

      As it stands at the moment, we are paying full freight each month for health care insurance as we do not qualify for subsidies. Even though I wrote a post about how millionaires can qualify for healthcare subsidies, it doesn’t feel right. It’s not what the law was intended to serve.

      Please share what you are planning on doing for 529s, paying for college, etc. Thanks!

      “What will happen to the money in the 529 account?” – Wealth transfer to daughter or other relatives. This post is focused on the idea of creating an educational endowment for future generations.

      I think it’s a good idea to spread around your assets for tax liability and income purposes.

  24. Sam, a suggestion for a future post or if you have a current resource that you can link to that answers this question — is what are the best state plans? I have a newborn daughter and have read the fine print for NY and UT’s plan, but I really don’t want to read it for all 50 or even the top 10 or 15 state plans. Would love your thoughts on this. For example, in the comments above, are all the plans the same when it comes to withdrawals of contributions and earnings? Or do some allow you to withdraw only contributions without earnings? I think many people choose a 529 plan based on the state they live in for tax purposes, but I live in FL and since there is no state income tax, there is no deductibility on state income taxes; therefore, I’d be happy to invest in another state’s plan if it was a better choice.

    1. I will post a comment here. I think the rules on withdrawals are the same, as they are regulated by IRS.

      As far as across different states, across my 3 kids, we have 3 529s, in FL, in PA, and in VA. They all seem to have performed equally well, except Virginia, but I think Virginia is because I stopped investing in 2017, so hasn’t gotten all the dollar cost averaging of recent volatility. I live in Pennsylvania, so I get a state tax break for contributions to ANY state’s plan.

  25. Interesting!

    A side question. Which 529 do you recommend?

    I guess this generational thinking would win out over building a taxable stock portfolio of individual growth stocks. Or does it?

    Does it make sense when 529 returns below 9% vs some hot stocks or even just the QQQ return in a taxable account?

    1. For my 510(k) in PA and FL, I chose the funds. In PA, I have 70% in Vanguard Total Stock and 30% in Vanguard Total Int’l Stock. In FL, I have it split in Domestic, Int’l, and Small caps. The performance of those funds are comparable to if they were in mutual funds in the stock market, except they grow tax free. They also take advantage of dollar cost averaging since I make a monthly contribution. Keep in mind on hot stocks, it’ll all about timing, and at least for me, I’ve never done well with timing.

    2. You’ve got to got with the investment options provided by your 529 plan. It’s not like a self-directed IRA where you can invest in single stocks and speculative investments, at least not that I’m aware of.

  26. Whatever “average intelligence” you claim, you certainly have an above average understanding of personal finance and income/wealth generation. Imparting that wisdom to your children will set them up for success in life more than an Ivy League school, the value of which seems to be declining in the corporate world.

    1. Thanks. Just trying to be realistic about my children’s future. It was a struggle for me to not understand so many things growing up and not be able to grasp things as quickly as others. As they say, the apple doesn’t fall too far from the tree.

      Thankfully, we can all put in the work to try and understand things better. I’m definitely most excited to teach my kids what I’ve learned over the next 15-17 years until they potentially leave home.

      Related: Perpetual Failure: The Reason Why I Continue To Save So Much

  27. Doesn’t changing the beneficiary beyond an immediate family member or child trigger count as a gift towards your unified tax credit? So changing the beneficiary to a grandchild would count as a gift?

    1. I don’t believe it is restricted to immediate family, just eligible relatives.

      Son, daughter, stepchild, foster child, adopted child or a descendant
      Son-in-law, daughter-in-law
      Siblings or step-siblings
      Brother-in-law, sister-in-law
      Father-in-law, mother-in-law
      Father or mother or ancestor of either, stepmother, stepfather
      Aunt, uncle or their spouse
      Niece, nephew or their spouse
      First cousin or their spouse

  28. I try to learn something new each week, or each day if possible. So thanks for sharing so many great insights about 529s! I never thought about a 529 as a method of generational wealth transfer before but I can see the benefits. I hope I have grandkids someday; that would be amazing. And to be able to effectively pass down a 529 to them would mean a lot. and save on taxes. Thanks!

  29. I have a child on the way due in a couple of months. I opened a 529 plan, but I’m hesitant to fund it, so this post is timely. I was reading that for financial aid they take into account of the kid has a 529 plan which may reduce some of the financial aid. Also, I have no idea if in 16 years if the kid will go to any school and that 10% penalty will suck. Like you said hopefully appreciation will cover that. I think there is also a state tax savings but only if the plan is within that state.

    1. The 10% penalty is ONLY for earnings, not the original principal. Also, at least in Pennsylvania, you get a state tax deduction for contributions to any state’s plan, doesn’t have to be Pennsylvania. I have 3 kids, and I am more worried about them wanting to go to graduate school, than not using it. And if one doesn’t use it, I’ll change the beneficiary to another. I’m just glad I started early and let it grow.

  30. Chuck Sarahan II

    I understand the idea but I insist that the grandkids have skin the game in regards to their education. We will pay for two years of community college and they will have to pay the last two years. Assuming money left over, it can be used for professional school or their kids. I may change this to two years of undergrad schooling at a four year college but I really want them to understand the value of an education. Sometimes having to pay for your own education forces you to grow up and that is valuable in its own right.

    1. Agree. One alternative is to just not use any or most of the 529 plan to pay for college, and leave it for generational wealth transfer purposes in the future.

      I think a lot of it depends on the kid and how we raised them to appreciate work ethic and money.

  31. Assuming you have already maxed out your lifetime gift/estate exemption— do you get taxed on 529 contributions above the annual gift limit?

    1. Can you clarify using numbers? You mean, what if you have already given $11.7 million so far? It’s hard to say b/c we don’t know what the future limits will be.

      I don’t see you getting taxed on the $15K contribution to a 529 plan this year while you are living. Not sure how the IRS could go after that.

  32. I respect what you are doing for your kids, and this is clearly a good idea for those with plans to leave large inheritances.

    I for one am funding my kids 529 plans, but their 529s will only pay for state schools and room/board. I just can’t commit to going full bore on this when I have no idea if my kids will even go to college. I like the idea of supporting them in a reasonable way, and letting them figure out the rest (hopefully that means no student loans though!).

    1. I used to think only state school given that’s where I went.

      However, as soon as I shifted my mindset to the next generation, my potential grandkids, it made it easier to contribute to the maximum gift tax exclusion limit up to the 529 plan limit.

      It’s interesting, but as soon as I start thinking about trying to take care of unborn grandchildren, I get fired up to help them. We may not always have a chance.

      Having our children start from zero to save for their children seems unnecessary if we can do so right now. And then from an Investor’s perspective, I’m sure our children, when they become parents, will wish we had invested more in real estate, stocks, and other risk assets today.

      So it’s like going into the future and understanding what they want and then coming back to the past and making it so.

  33. Hi Sam, just a quick note on withdrawing contributions. I looked into this recently and it’s not possible to make a basis only withdrawal, unlike a Roth IRA, you must withdraw a portion of earnings with every 529 plan distribution. If your 529 has increased significantly then you would end up taking a big chunk out of earnings and owing the tax, i called our 529 plan to check and it turned out that a withdrawal would be made up of 50% earnings. Not quite what I was expecting!!

    1. Thanks for the note! And good to clarify. What did you plan to do with the withdrawals? Did you overcontribute to your 529?

      I’d double check that you can’t withdraw your capital contributions to your 529 plan only. I can, and I’ve checked other places.

      1. Hmmm interesting, we weren’t going to use them for qualified expenses, I was hoping we could withdraw contributions only and not pay the tax on earnings, however, our plan was very clear that you couldn’t withdraw contributions only and any withdrawal would consist of contributions and earnings with taxes due on the earnings portion, using the following formula…

        (Total Contributions / Value of 529 Plan Account) * Amount of Distribution = Basis Portion

        Amount of Distribution – Basis Portion = Earnings Portion

        I guess it might be time for us to change 529 plans if this isn’t the case!

      2. Sam which 529 plan to do you use that allows of capital contributions only? Similar to the poster below, I found our plan (NY) won’t allow contribution-only withdrawals. (Not planning any withdrawals right now, but this would be a reason to not ‘over-contribute’) – if wealthy enough to leave it for generational transfer that would be great, but at the moment I was considering contributing larger sums to the 529 while I don’t have access to a backdoor Roth.

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