As quickly as each my kids have been born in 2017 and 2019, I superfunded their 529 plans equal to the five-year reward tax exemption. On the time, I used to be thrilled to do it given a dad or mum’s primary accountability is to offer for his or her kids.
Lastly, a tax-efficient approach to shift a few of my property to 2 necessary dependents. My mother and father and my spouse chipped in every year as nicely. As soon as the five-year contribution window reset, I saved going, contributing as much as the annual reward tax restrict.
By June 2024, I hit a wall. I had reached my aim of funding 4 years of full-priced personal college tuition in a 529 plan—sufficient to ideally match or outpace school value inflation. With that field checked, I all of the sudden felt adrift, like I had misplaced a key supply of objective. It was a mini parental existential disaster after fulfilling one of many greatest monetary tasks now we have.
Having kids gave me renewed vitality to earn and save put up early retirement, which was one thing I genuinely loved. It bolstered my ikigai, or purpose for being. However after assembly these targets, I began questioning: What now?
Second-Guessing My 529 Plan Contributions
As soon as the 529 balances hit my goal, I additionally started to query whether or not I had contributed too aggressively. Recently, I’ve had this recurring concern: think about finding out and paying 16 years’ value of tuition, solely to be changed by AI. This case is occurring proper now to 1000’s of faculty graduates, and I do not need my kids so as to add to the statistics.
Even with the mediocre returns of a target-date index fund, the market rebounds in 2023 and 2024 pushed the accounts greater than anticipated. And my son has 10 extra years of compounding to go earlier than he hits school. Will school actually value our household $750,000+ for 4 years when it is his time?
In hindsight, I may have directed extra of that capital into UGMA custodial accounts for higher flexibility. Alternatively, I may have invested extra in my most well-liked personal AI/progress fund that holds the very names that would make discovering a job troublesome for my kids.
Anthropic, a high holding, is reportedly elevating as much as $5 billion at a $170 billion valuation, up from a $63 billion valuation simply earlier this yr! Ah, I want I had invested much more cash in personal AI firms.
Might Have Lived It Up Extra In the present day
Selfishly, I may’ve purchased a Lambo and YOLOed extra in mid-life as a degenerate poker participant in Vegas. It has been one in every of my desires. We may’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer time—and finished the identical for a lot of summers to come back. As an alternative, I made a decision to economize and create priceless recollections dwelling with my mother and father in my childhood residence.
Alternatively, we may have used his 529 plan cash to develop our household’s passive revenue portfolio by an extra $20,000 a yr to purchase extra time freedom at this time. With much less cash locked right into a 529, we’d additionally really feel much less strain for our son to attend school in any respect.
For those who’re enthusiastic about having kids, are you actually ready to sacrifice your time, cash, and freedom for them? Elevating children isn’t low cost—particularly if you wish to assist them go to varsity. Don’t let anybody inform you in any other case. Odds are, your youngster received’t get an athletic scholarship or be within the high 1% academically. That’s why the most effective factor you are able to do is save and make investments aggressively on their behalf.
Excessive Threat For Sending Our Youngsters To School In The Future
The considered forking over ~$400,000 in at this time’s {dollars} for faculty, just for them to finish up in a minimal wage job, makes me just a little sick.
I nonetheless bear in mind opening my neighborhood McDonald’s at 6 a.m. and getting chewed out by my power-tripping supervisor whereas flipping egg McMuffins. However I used to be only a highschool scholar. To lay our a fortune on school simply to finish up dwelling at residence and doing the identical factor seems like an excessive amount of of a letdown. You don’t want a level to prepare dinner frozen meat patties.
Fortuitously, the One Huge Stunning Invoice Act (OBBBA) has made 529 plans extra beneficial going ahead. Right here’s what modified.
529 Plan Enhancements Below the OBBBA
I wrote in regards to the OBBBA’s impression on FIRE seekers. Now let’s take a look at a extra detailed look on the OBBBA’s impression for fogeys saving for his or her kids’s schooling. For those who’ve been worrying that you simply overfunded your kids’s 529 plans, this put up ought to allow you to really feel just a little higher.
1. Broader Listing of Certified Schooling Bills
Part 70413 of the OBBBA expands what’s thought of a “certified schooling expense,” significantly for Ok–12 college students. Right here’s what’s now lined beginning July 4, 2025:
- Tuition for public, personal, or spiritual Ok–12 colleges
- Curriculum and educational supplies, together with on-line programs
- Books and educational provides
- Tutoring companies (if licensed and unrelated to the coed)
- Standardized check charges (SAT, ACT, AP exams, and so forth.)
- Twin-enrollment school course charges
- Instructional therapies for college students with disabilities
Based mostly on this expanded record of certified schooling bills, it certain looks as if virtually something goes. And I am undecided how the federal government can penalize you if it is a grey space.
Instance: In case your eighth grader is struggling in math and also you pay $150 per session for a licensed tutor, these periods can now be paid for utilizing 529 funds. Similar factor when you spend $1,000 on AI programs to assist increase your kid’s productiveness.
Simply observe: federal tax-free standing doesn’t all the time imply state tax-free. For instance, California doesn’t conform to the federal definition of certified bills. For those who withdrew $500 for an AP prep course that included $200 of account earnings, you would possibly owe ~$15 in state taxes and $5 in penalties on the earnings.
2. Larger Annual Limits
The OBBBA will increase the Ok–12 eligible expense restrict from $10,000 to $20,000 per yr beginning in 2026. This helps households with children in personal college or specialised packages pay extra out of their 529 tax-free. Whereas this received’t have an effect on most households, it’s a win for a lot of households in massive cities paying for personal grade college.
For instance, personal grade college in Honolulu prices round $33,000 a yr from Ok by way of grade 12. In San Francisco and New York Metropolis, tuition ranges from $45,000 to $65,000 yearly. With the ability to withdraw as much as $20,000 per youngster from a 529 plan to cowl these prices provides significant reduction.
Take the basic $500,000 family with two children in personal college costing $100,000 a yr complete. That’s roughly $150,000 in gross revenue going simply to tuition. After taxes, there internet revenue after paying tuition would possibly solely be about $100,000 – $150,000 to pay for lease or a mortgage, meals, transportation, garments, retirement, and journey.
Utilizing $40,000 a yr in mixed 529 plan funds helps stem the monetary bleeding and provides much-needed flexibility. However to take action, the mother and father first have to save lots of aggressively.
3. Postsecondary Credentials Now Coated
One of many greatest psychological blocks for funding a 529 plan was: “What if my child doesn’t go to varsity?” Part 70414 addresses that by permitting 529 funds for use for:
- Trade-recognized credentials (e.g., Licensed Monetary Planner, CISSP, AWS certifications)
- Registered apprenticeships (e.g., electricians, plumbers)
- State-licensed skilled packages (e.g., cosmetology, HVAC certification, masseuse)
- Any credential lined underneath the Workforce Innovation and Alternative Act (WIOA)
Instance: In case your youngster needs to turn into a licensed HVAC technician and enrolls in a state-recognized coaching program costing $6,000, now you can pay for that program — and required gear — utilizing 529 funds tax-free.
With synthetic intelligence poised to remove thousands and thousands of white-collar workplace jobs within the coming years, it’s sensible to think about careers in additional AI-resistant industries.
Trades like plumbing and electrical work already supply six-figure revenue potential, and demand is barely rising. After spending over $40,000 reworking an in-law unit in Honolulu, I’ve little doubt that plumber and electrician earnings will proceed to develop.
4. Coordinating With the AOTC Tax Credit score
One other underutilized profit is coordinating your 529 withdrawals with the American Alternative Tax Credit score (AOTC) — value as much as $2,500/yr for 4 years. You may get the total credit score when you spend $4,000 out-of-pocket on tuition and charges. Or, if you wish to use 529 funds and nonetheless declare the AOTC, there’s a approach to try this too — with a small tax hit.
Instance:
- You withdraw $8,000 from a 529 plan for tuition.
- You declare the AOTC for $4,000 of these bills.
- Now, solely $4,000 of your 529 withdrawal counts as a certified distribution.
- If half your withdrawal ($4,000) got here from earnings, then $2,000 of earnings now turns into taxable revenue.
At a 22% tax fee, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination provides you choices when you’ve overfunded a 529 for certified instructional bills or need to optimize your return. To make clear, the AOTC is a tax credit score — it immediately reduces your tax invoice, greenback for greenback. A 529 distribution is tax-free solely on earnings used for certified bills, not a dollar-for-dollar credit score. Subsequently, the AOTC tax credit score will prevent extra.
5. The Means To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though having the ability to roll over unused 529 plan cash is because of the SECURE 2.0 Act, not the OBBBA, it is nonetheless value mentioning. Beginning in 2024, unused 529 plan funds can now be rolled over right into a Roth IRA for the beneficiary, as much as a lifetime most of $35,000. This rule supplies households with a beneficial approach to repurpose leftover schooling funds and kickstart a toddler’s retirement financial savings, tax- and penalty-free.
Nevertheless, there are some key restrictions. The 529 account will need to have been open for at the very least 15 years, and solely contributions (and their earnings) made greater than 5 years in the past are eligible. As well as, rollovers rely towards the beneficiary’s annual Roth IRA contribution restrict, which is $7,000 in 2025, and the beneficiary will need to have earned revenue equal to or higher than the rollover quantity in that yr.
For instance, in case your daughter labored part-time and earned $6,000 in 2025, you may roll over as much as $6,000 from her 529 into her Roth IRA that yr. This implies it will take at the very least 5 years to completely roll over the $35,000 most, assuming she earns sufficient yearly.
Even when you nonetheless have 529 plan cash left over after the Roth IRA rollover, you’ll be able to all the time designate the beneficiary to another person. Your grandchildren want an schooling too.
Reinvigorated Instructional Planning
Because of the OBBBA’s updates to 529 plans, I am much less involved about overfunding two 529 plans. As an alternative, I now see extra flexibility and utility than ever earlier than. Whether or not my children select to attend school, pursue commerce college, or comply with a credentialed profession path, the funds will probably be there—and so they can now be utilized in extra methods than earlier than. And if they do not use all of the funds, I’ll signal the plans to their kids.
Sure, I discuss wishing I may spend the 529 steadiness on having fun with life extra at this time. However understanding my monetary habits since graduating in 1999, I’d in all probability simply find yourself investing the cash anyway.
For those who’re a dad or mum or grandparent, it’s a good time to revisit your 529 contribution technique and reap the benefits of the brand new guidelines. Even when your property is projected to fall underneath the property tax threshold, contemplate contributing as much as the reward tax restrict anyway. Encourage your accomplice and the grandparents to do the identical.
With these modifications, the 529 plan has turn into one of many strongest generational wealth switch automobiles accessible. Relatively than merely gifting money, you’re passing down the chance for schooling, one thing that may be much more beneficial over a lifetime.
Reader 529 Plan Questions
Readers, are you as pumped as I’m that you could now use $20,000 a yr from a 529 plan for personal grade college tuition? Have you ever ever heard of the AOTC (American Alternative Tax Credit score) earlier than? Do you suppose these enhanced 529 advantages will simply make school much more costly in the long term? And eventually, how a lot do you suppose is an excessive amount of to have saved in a 529 plan?
Diversify Past The 529 Plan
A 529 plan is without doubt one of the greatest instruments to fund your youngster’s schooling tax-efficiently. However don’t cease there. Diversifying your loved ones’s portfolio past schooling financial savings is simply as necessary, particularly if you wish to give your children optionality and monetary safety it doesn’t matter what path they select.
That’s why I’ve additionally invested in actual property by way of Fundrise, a platform that permits you to passively put money into a diversified portfolio of residential and industrial properties. With over $3 billion in property underneath administration, Fundrise focuses on Sunbelt markets the place valuations are extra enticing and yields are usually greater—an interesting hedge towards inflation and market volatility.
You may also put money into Fundrise Enterprise, which supplies publicity to non-public AI firms like OpenAI, Anthropic, and Databricks. With AI poised to reshape the job market and your kids’s future profession prospects, I need to ensure I’m investing not simply of their schooling, but additionally within the applied sciences shaping tomorrow.
I’ve personally invested over $445,000 with Fundrise and Fundrise is a long-time sponsor of Monetary Samurai. My thought course of is that if I am prepared to speculate $400,000+ in a 529 plan per child, I also needs to be prepared to speculate at the very least $400,000 in personal AI firms set to disrupt their lives. With a minimal funding of simply $10, constructing generational wealth past the 529 plan has by no means been extra accessible.
