It’s May, it’s May! 5/29 is College Savings Day!

If you read my last blog, hopefully you could sense my excitement regarding Roth IRAs. If not, then re-read it imagining I’m using my “outdoor voice.”

Well, another account type that I often evangelize is the 529 College Savings Account. I’d like to spend some time walking you through the various advantages now, later, and as an estate planning tool just like I did with Roth IRAs.

“But Brent, why are you so excited about 529s? Are you some kind of nerd or something?”

First of all, yes.

*adjusts glasses*

Second of all, what makes me excitable is that there has been such dramatic changes over the past few years that directly impact clients on various levels, and directly address most clients’ concerns regarding 529s. Unfortunately, it seems to be a closely held secret, so I love spreading the news.

First, allow me to set the stage for how some may save or pay for college:

1. Invest in a 529 account.

These are the “new hotness” of college savings. More details later.

2. Invest in an Educational Savings Account (ESA), which is also known as a Coverdell.

These accounts are the “old hotness” of college savings, because they are so limited relative to a 529.

• Coverdells are tax deferred college savings accounts like a 529 (good)
• They have relatively low contribution limits of $2,000 per year (lame)
• They have income limits for the donors (lame)
• You can’t contribute to them after the beneficiary turns 18, and have to fully distribute the money by the time the beneficiary is 30 (super lame)
• Coverdells have the benefit of being able to use the funds for pre-college private school expenses, but it’s no longer a unique feature since 529s can do this as well (again, keep reading!)

3. Invest in a UTMA/UGMA or other Custodial Account.

These are not tax-advantaged accounts, are not required to be used for educational expenses, and must be transferred to the beneficiary at age 18 or 21 (depending on the state) whether you like it or not. This can be a risky proposition for a wayward youngster.

4. Pay cash or sell investments to fund college.

It happens, but most parents are incapable of cash-flowing college at today’s tuition rates. Take a second and go look up the total cost of a year at TCU or NYU. You’re going to want to be seated.

5. Student Loans

This is where a recently legal adult signs up for what can amount to crippling lifelong student loan debt. In many instances, the schools get the parents to co-sign on the debt, spreading the crippling lifelong student loan debt to them as well. I’m sure you’ve read about it more in the news lately or are currently cussing out loud because I struck a nerve.

Now back to 529 accounts!

Here is a list of features of 529 accounts that set them apart from the other options above:

• A 529 is a tax-deferred college savings account: The growth is tax deferred, and all funds can be used tax-free as long as they are for Qualified Educational Expenses (feel free to Google the expansive list of items that qualify).
• The client who establishes the account is the owner, and the child is the beneficiary: This differs from a UTMA or UGMA where the account must be given to the beneficiary at the respective state’s Age of Majority (18 or 21). If you’d like, there can be “strings attached” to the distributions such as requiring the child to get minimum grades, studying a major that has actual usable work skills, or more important items such as calling Grandma on her birthday.
• Depending on your state, the contributions may be deductible against your state taxes: Clients in Texas or other no-state-tax states aren’t eligible, because there’s nothing to deduct against. However, residents of Michigan, Ohio, or South Carolina, for example, may get a state income tax deduction against a portion or all of contributions made to that state’s respective 529 plan. For example, a Michigan resident may deduct up to $10,000 of contributions to a Michigan 529 plan, per child, against their Michigan state taxes.
• The current contribution limit for 2025 is $19,000 per contributor, per beneficiary: This means Mom can contribute $19,000 to a child’s account, and Dad can contribute $19,000 to the same child’s account, totaling $38,000 per year. So can Grandma and Grandpa, so do the math and it adds up fast!
• You may accelerate 5 years’ worth of contributions per contributor, per beneficiary: This means that a contributor may make a $95,000 contribution in a lump sum as long as that individual does not contribute again over the subsequent 5 years. There is actually an exception that if the Annual Gift Exclusion limit (currently $19,000) increases during that 5 year period, you can catch-up to the new Annual Gift Exclusion level. This means that a couple (parents, or grandparents) can contribute a lump-sum of $190,000 to an individual child’s 529 account.
• 529 Accounts may be used to fund private primary or secondary education: This no longer is unique to Coverdell (ESA) accounts. The 529s can pay for up to $10,000 per year, per child to private school expenses before college.
• There is no age limit: Unlike the Coverdell or UTMA accounts, there is no age limit for contributions into the account, and there is no age limit where the money must be distributed.

“But Brent, what if I accidentally overfund the 529 Account? Is the money trapped in the account? What if little Bobby gets a scholarship, goes to the Naval Academy or West Point, or doesn’t go to college at all? We’ve been watching Dirty Jobs with Mike Rowe!”

I’m glad you asked! Because over the past few years, 529s have expanded their portability and usability to address this very concern!

• The 529 funds may be transferred to a new beneficiary as long as they are a Qualified Family Member: If one child doesn’t go to college or isn’t earning the grades that you feel warrant use of college funds, you can transfer those assets to another family member. The definition of Qualified Family Member is expansive.

Qualified Family Members are defined by IRS Publication 970 as follows: 1) son, daughter, stepchild, foster child, adopted child, or a descendant of any of them; 2) brother, sister, stepbrother, or stepsister; 3) father or mother or ancestor of either; 4) stepfather or stepmother; 5) son or daughter of a brother or sister; 6) brother or sister of father or mother; 7) son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law; 8) the spouse of any of the individuals listed above; 9) first cousin.

• In the same vein, your child can keep the account as a legacy asset and pass the 529 to their child: Generational impact!
• In some states, the beneficiary and each of the beneficiary’s siblings may use up to $10,000 to repay outstanding student loans: This helps reduce that before-mentioned lifelong crippling student loan debt you keep reading about in the news.
• You can convert up to $35,000 of 529 funds to the beneficiary’s Roth IRA: This is the most recent development with 529s and is amazing. See below for list of requirements.

The 529 plan must be open for 15 or more years. Contributions and associated earnings must have been in the 529 plan account for at least five years to qualify for a rollover to a Roth IRA. Contributions and associated earnings made within the last five years are ineligible. The 529 to Roth IRA rollover is subject to the IRA annual contribution limit for the taxable year, applicable to the beneficiary for all individual retirement plans maintained for the benefit of the beneficiary. Thus, the total amount that can be rolled over from a 529 plan to a Roth IRA annually is the annual IRA contribution limit for the year, reduced by the total of any other IRA contributions made by the beneficiary in that year. The contribution limit for 2024 is $7,000 for a beneficiary under age 50 and $8,000 for a beneficiary age 50 or older/ The beneficiary must have earned income sufficient to make the contribution into the Roth IRA.

And finally, some strategy and planning considerations for 529s

I’ll show some ways that I’ve leveraged 529s on behalf of clients, and even some ways that I’m personally leveraging 529 accounts for my family.

1. Education planning for current children

The moment your child has an SSN, you can open a 529 account with the child as beneficiary. Because of the power of compounding and growth, the earlier the better. Remember, this money may be used to offset private school costs before college, then college expenses should the child go to college.

2. Education planning for future children

We do not yet have children, but God willing we will someday. However, I opened a 529 account for myself as owner and beneficiary approximately 7 years ago. Remember how I said there is no age limit on contributions, and no age of mandatory distributions? If we have a child, then the child’s new 529 account will start with several thousands of dollars the moment that child has an SSN.

If we don’t have children, then I have the option of transferring the assets to one of my nieces and nephews that may need the funds. One niece calls me handsome every time she sees me, so betting odds are that she’s the benefactor. Or, once the account is open for 15 years, I can convert chunks of the account to my own personal Roth IRA so that it turns into tax exempt retirement dollars.

3. Using the 529 to receive gifts

My brother has 4 children, and my sister has 3 children. Prior to Christmas one year, my brother politely asked that Santa not bring any additional Thomas the Train toys, bed sheets, shower curtains, or other accessories similar to what had taken over his home. Additionally, his feet were raw from stepping on Legos.

So I opened 529 accounts for each of the 7 kids, and my folks and I have contributed small amounts here and there for birthdays, Christmas, or other special occasions. Of course the kids love getting laser tag toys and dinosaur books, but the 529 contributions are a nice addition for all adults involved.

4. Planning for Roth Conversions

Remember, those 529 contributions for a child can either be used for qualified educational expenses, or for Roth conversion. As the educational landscape is quickly evolving, there’s an ever increasing chance that the accounts will be available for those Roth conversions.

5. Flushing money out of a Gross Taxable Estate

As a technique for removing assets from a large Gross Taxable Estate that may be subject to Estate Taxes, funding 529s is a fantastic option.

Remember, each donor can currently contribute a lump-sum of $95,000 per child/grandchild/beneficiary every 5 years. A married couple may therefore gift $190,000 to each child or beneficiary without being subject to Gift Taxes and therefore lowering their Gross Taxable Estate which may be subject to 40% Estate Taxes.

Here’s an example of what’s possible: Generous and tax-tactical grandparents with 8 grandchildren can purge at least $1,520,000 from their Gross Taxable Estate every 5 years by funding 529 accounts for those 8 grandchildren.

If, at this point, you’re not overwhelmed with excitement about all of the interesting features and benefits of 529 accounts, then don’t fuss about it because I’m excited enough for the both of us. Certainly reach out if you have any questions, and don’t hesitate to share this information!

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Brent Elyea and not necessarily those of Raymond James.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Changes in tax laws or regulations may occur at any time and could substantially impact your situation. While familiar with the tax provisions of the issues presented herein, Raymond James Financial Advisors are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional.

529 plans come with fees and expenses, and there is a risk they may lose money or underperform. Most states offer their own 529 programs, which may provide benefits exclusively for their residents. Please consider whether the state plan offers any tax or other benefits. Tax implications can vary significantly from state to state. Certain changes in beneficiary may result in a taxable event. Death of the contributor prior to the end of the five-year period may result in a portion of the contribution to be included in the contributor’s estate. State tax treatment of K–12 withdrawals is determined by the state(s) where the taxpayer files state income tax.