Financial Advisor's Blueprint for Harnessing the Potential of a 529 Plan
High-net-worth families are leveraging a blend of 529 plans and other financial tools to maximize tax efficiency, maintain flexibility, and preserve control over their education savings.
529 plans, named after Section 529 of the Internal Revenue Code, offer tax-free growth and tax-free withdrawals for qualified education expenses. One key advantage is that contributions are considered completed gifts and are removed from your taxable estate. A common myth is that you must use the 529 plan in your state, but plans are portable across states and schools.
To maximize the tax benefits of 529 plans, families can "superfund" a 529 by contributing up to five times the annual gift tax exclusion in one year without penalty, accelerating tax-advantaged growth. Distributions from grandparent-owned 529 plans are not counted as the student’s income on the FAFSA, improving eligibility for financial aid by reducing reportable assets.
High-net-worth families often fund about 50-75% of education costs into 529 plans and keep the remainder in taxable brokerage accounts to maintain liquidity and flexibility for nonqualified expenses or alternative educational paths. While taxable accounts come with capital gains tax risk on withdrawals, they offer fewer spending restrictions.
Complementary financial tools include UGMA/UTMA custodial accounts, education trusts, and direct tuition payments by grandparents. UGMA/UTMA accounts allow gifting beyond 529 limits but transfer control to the beneficiary at adulthood, which may not suit every family. Education trusts provide oversight and control, especially useful for complex legacy goals or special needs considerations. Direct tuition payments by grandparents can reduce their taxable estate and avoid gift tax limits.
Starting contributions at or near the child’s birth and investing regularly can roughly double the accumulated college savings compared to starting later, benefiting from compounding over time. Recent changes and proposals allow 529 funds to pay for a broader range of educational expenses beyond college tuition, increasing flexibility.
In states that offer a tax deduction for 529 contributions, front-loading five years' worth of gifts can provide a meaningful tax benefit. Funds can also be used for K-12 tuition (up to $10,000/year per student) with certain stipulations.
With this blended strategy, high-net-worth families tailor education funding to provide tax efficiency, preserve financial aid eligibility, maintain control over assets, and adapt to varied educational paths or family goals. 529 plans remain the gold standard for education savings, offering a balance between growth potential in tax-advantaged accounts and the flexibility and control offered by other savings vehicles.
Personal-finance strategies for high-net-worth families incorporate 529 plans, which offer tax-free growth and withdrawals for education expenses, alongside other tools such as education trusts and UGMA/UTMA accounts. To maximize the tax benefits of 529 plans, education-and-self-development efforts might include learning about the option to superfund a 529 by making large, annual contributions without penalty, or understanding that distributions from grandparent-owned 529 plans are not counted as student income on the FAFSA.
