529 Plans: More Than the Gift of Education, an Estate and Tax Planning Oasis

By Steven M. Rogé, MBA, CFP®, AIF®
Managing Director & Chief Investment Officer

Giving the gift of education is a wonderful endeavor, and a frequent financial planning goal of our clients. For those not familiar, a 529 plan is a state administered, tax-advantaged educational savings account in which you would ideally contribute after-tax money to invest and grow. When you pay for qualified education expenses, the money in the 529 plan is not subject to taxes coming out of the plan. In addition, most states give an extra incentive to contribute in the way of state tax deductions.

Contributions can be made to 529 plans in one of two ways. First, annual gifting of $15,000 per person per beneficiary, or $30,000 for a married couple. The second way is to front-load your contributions by lumping 5 years of contributions into one. That is a $75,000 gift for someone filing single, and $150,000 for a married couple. You may do this again in another 5 years to transfer even more assets that will not eat away at your estate tax exemption.

Although there are many advantages of utilizing a 529 plan, there are a few disadvantages as well. Use our below list of “pros” and “cons” to see if a 529 plan is right for you and your loved ones.


Tax Advantages
The tax incentives associated with 529 plans are nothing to sneeze at. One study showed that a tax-free 529 plan could potentially exceed a taxable account by almost $48,000 over an 18-year period. It is unlikely that the tax rate, both for income taxes and capital gains taxes, will be reduced over the coming years, so the tax savings could potentially be even higher.

Estate Planning Advantages
The 529 plan can also be an effective estate planning tool. With the 2017 tax reform package, there are even more ways to spend assets in a 529 plan, including costs associated with K-12 education and apprenticeship programs. With the lowering of estate tax exemptions possible, it is even more important than ever to explore every way to be able to transfer assets to the next generation in a tax and estate friendly manner. Assets contributed to a 529 plan are considered outside of your estate. Furthermore, if you abide by the annual exclusion amount ($15,000 per person and $30,000 per couple), they will not count toward your lifetime estate tax exemption of $11.7 million for 2021.

Additional estate planning techniques can be developed with the use of a Trust owning the 529 plan so you can avoid the potential of an untimely death or incapacitation of an owner. Instead, seamless control with a successor trustee and fiduciary can be established. If you can’t think of any individual that could make these decisions for you, then consider a corporate trustee that will act as a fiduciary for generations to come. In addition, 529 plan assets in a trust will have greater protection against potential predators and creditors.

Legacy Planning Advantages
Keep in mind that there are state contribution limits with 529 plans. For example, in New York, you may contribute up to $520,000 per beneficiary. While tuition at an expensive private college like New York University (NYU) is about $75,000 per year and might gobble-up the assets in a 529 plan within one generation, you can make sure your 529 plan remains for future generations by utilizing your unlimited gifting for direct payments toward qualified education expenses. For example, say you have two grandchildren attending NYU at a cost of $75,000 each per year. You may pay the University for tuition directly without affecting your yearly $15,000 per year exemption. This would not affect your lifetime exemption and will bypass any generation skipping taxes. A married couple in New York with four grandchildren could remove $600,000 ($150,000 per grandchild) from their estate on day one. In five more years, another $600,000 could be transferred, and so on. Millions of dollars can be transferred, and you are in the unique position of maintaining control of these assets during your lifetime. For those interested in building a multi-generational account for education we suggest you bypass the default age-based asset allocation investment and instead consider a more aggressive investment allocation to outpace the rising cost of education over the long-term.

If your child or grandchild chooses not to attend college, as the 529 account owner, you have the right to change beneficiaries to a different family member. This can include a sibling, first cousin, grandparent, aunt, uncle, or even yourself. Remember you can use the plan for any qualified education expenses, including things like tuition, fees, books and supplies, computers, room and board, trade or vocational schools, or to pay off student loan debt.

Low Maintenance
A 529 plan can be opened easily online or through a financial advisor and is a great option for anyone who prefers to “set it and forget it.” In addition, anyone can contribute to a 529 plan, regardless of who owns the account. This can include parents, grandparents, stepparents, aunts, uncles, and friends.


Limited Investment Options and Potentially Higher Fees
Depending on your state, a 529 plan may not offer your preferred investment option. For instance, some states may offer high-cost funds or might have a limited fund selection. If you’re a “hands on” type of investor with a lot of experience, a 529 plan may not be as appealing as other types of investing, like individual stocks. Because of the limited selection, fees may also be higher than if more options were available.

Financial Aid Interference
Having a 529 plan may limit the amount of other financial aid a student is eligible to receive. However, you may be able to avoid this by putting the 529 plan in your name, instead of your child / grandchild’s name, or switching the plan to your name prior to the student attending college. At that point, the savings would not be included in the financial aid available to the student.

Ineligible Withdrawals
Although you can choose to use the money for non-qualified education expenses, beware that you will have to pay income taxes, plus a 10% penalty on earnings.

Our team of knowledgeable CERTIFIED FINANCIAL PLANNERS™ (CFP®) can help determine if a 529 plan is right for you. In addition, we now have the capability to pro-actively manage 529 plan investments for our clients. If you are interested in learning more about planning for future generations, please reach out to us at 631.218.0077 or info@rwroge.com. We would be happy to go into further detail and answer any questions you may have regarding this strategy.

R.W. Rogé & Company, Inc. is a fee-only financial planning and wealth management firm serving clients locally and virtually across the country, with Long Island, New York and Ipswich, Massachusetts office locations. We help clients Plan, Achieve, and Live® the life they want since 1986. To learn more about how we do this, click here.

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