As quickly as each my kids have been born in 2017 and 2019, I superfunded their 529 plans equal to the five-year present tax exemption. On the time, I used to be thrilled to do it given a mother or father’s primary duty is to offer for his or her kids.
Lastly, a tax-efficient approach to shift a few of my belongings to 2 of an important dependents in my life. My mother and father and my spouse chipped in annually as properly. As soon as the five-year contribution window reset, I saved going, contributing as much as the annual present tax restrict.
By June 2024, I hit a wall. I had reached my aim of funding 4 years of full-priced non-public college tuition in a 529 plan—sufficient to ideally match or outpace school price inflation. With that field checked, I abruptly felt adrift, like I had misplaced a key supply of goal. It was a mini parental existential disaster after fulfilling one of many greatest monetary tasks now we have.
Having kids gave me renewed power to earn and save submit early retirement, which was one thing I genuinely loved. It bolstered my ikigai, or cause 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. Currently, I’ve had this recurring worry: think about learning and paying 16 years’ value of tuition, solely to be changed by AI. This case is going on proper now to hundreds 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 price 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 better flexibility. Alternatively, I may have invested extra in my most popular non-public AI fund that holds the very names that might make discovering a job troublesome for my kids.
Anthropic, for instance, is reportedly elevating as much as $5 billion at a $170 billion valuation, up from a $63 billion valuation simply earlier this 12 months! Ah, I want I had invested much more cash in non-public AI corporations.
Might Have Lived It Up Extra At this time
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 all my desires. We may’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer season—and accomplished the identical for a lot of summers to come back. As an alternative, I made a decision to economize and reside with my mother and father.
Alternatively, we may have used his 529 plan cash to develop our household’s passive earnings portfolio by a further $20,000 a 12 months to purchase extra time freedom at the moment. With much less cash locked right into a 529, we’d additionally really feel much less stress for our son to attend school in any respect.
In the event you’re excited about having kids, are you really ready to sacrifice your time, cash, and freedom for them? Elevating youngsters 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 little one received’t get an athletic scholarship or be within the high 1% academically. That’s why one of the best factor you are able to do is save and make investments aggressively on their behalf.
Excessive Threat For Sending Our Youngsters To Faculty In The Future
The considered forking over ~$400,000 in at the moment’s {dollars} for school, just for them to finish up in a minimal wage job, makes me a bit 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 house and doing the identical factor looks like an excessive amount of of a letdown. You don’t want a level to cook dinner frozen meat patties.
Fortuitously, the One Large Lovely Invoice Act (OBBBA) has made 529 plans extra helpful going ahead. Right here’s what modified.
529 Plan Enhancements Below the OBBBA
I wrote concerning the OBBBA’s influence on FIRE seekers. Now let’s take a look at a extra detailed look on the OBBBA’s influence for fogeys saving for his or her kids’s schooling. In the event you’ve been worrying that you simply overfunded your kids’s 529 plans, this submit ought to allow you to really feel a bit higher.
1. Broader Listing of Certified Schooling Bills
Part 70413 of the OBBBA expands what’s thought-about a “certified schooling expense,” significantly for Okay–12 college students. Right here’s what’s now coated beginning July 4, 2025:
- Tuition for public, non-public, or non secular Okay–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 many others.)
- Twin-enrollment school course charges
- Academic therapies for college students with disabilities
Based mostly on this expanded listing of certified schooling bills, it certain looks as if nearly 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 an authorized tutor, these periods can now be paid for utilizing 529 funds. Identical factor in the event you spend $1,000 on AI programs to assist enhance your kid’s productiveness.
Simply observe: federal tax-free standing doesn’t at all times imply state tax-free. For instance, California doesn’t conform to the federal definition of certified bills. In the event you 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. Greater Annual Limits
The OBBBA will increase the Okay–12 eligible expense restrict from $10,000 to $20,000 per 12 months beginning in 2026. This helps households with youngsters in non-public college or specialised applications 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 large cities paying for personal grade college.
For instance, non-public grade college in Honolulu prices round $33,000 a 12 months from Okay via grade 12. In San Francisco and New York Metropolis, tuition ranges from $45,000 to $65,000 yearly. Having the ability to withdraw as much as $20,000 per little one from a 529 plan to cowl these prices presents significant aid.
Take the traditional $500,000 family with two youngsters in non-public college costing $100,000 a 12 months complete. That’s roughly $150,000 in gross earnings going simply to tuition. After taxes, there web earnings after paying tuition would possibly solely be about $100,000 – $150,000 to pay for lease or a mortgage, meals, transportation, garments, and journey.
Utilizing $40,000 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:
- Business-recognized credentials (e.g., Licensed Monetary Planner, CISSP, AWS certifications)
- Registered apprenticeships (e.g., electricians, plumbers)
- State-licensed skilled applications (e.g., cosmetology, HVAC certification, masseuse)
- Any credential coated below the Workforce Innovation and Alternative Act (WIOA)
Instance: In case your little one desires 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 tools — utilizing 529 funds tax-free.
With synthetic intelligence poised to remove hundreds of thousands of white-collar workplace jobs within the coming years, it’s smart to contemplate careers in additional AI-resistant industries.
Trades like plumbing and electrical work already supply six-figure earnings potential, and demand is barely rising. After spending over $40,000 reworking an in-law unit in Honolulu, I’ve little question 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 $2,500/12 months for 4 years. You will get the complete credit score in the event 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 professional distribution.
- If half your withdrawal ($4,000) got here from earnings, then $2,000 of earnings now turns into taxable earnings.
At a 22% tax fee, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination offers you choices in the event you’ve overfunded a 529 for certified academic bills or wish to optimize your return. To make clear, the AOTC is a tax credit score — it instantly 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 Capacity To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though with the ability to roll over unused 529 plan cash is due to 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 gives households with a helpful approach to repurpose leftover schooling funds and kickstart a baby’s retirement financial savings, tax- and penalty-free.
Nevertheless, there are some key restrictions. The 529 account should 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 depend towards the beneficiary’s annual Roth IRA contribution restrict, which is $7,000 in 2025, and the beneficiary should have earned earnings equal to or better than the rollover quantity in that 12 months.
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 12 months. This implies it might take at the very least 5 years to completely roll over the $35,000 most, assuming she earns sufficient yearly.
Even in the event you nonetheless have 529 plan cash left over after the Roth IRA rollover, you possibly can at all times designate the beneficiary to another person. Your grandchildren want an schooling too.
Reinvigorated Academic 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 youngsters select to attend school, pursue commerce college, or observe a credentialed profession path, the funds can be there—they usually 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 speak about wishing I may spend the 529 stability on having fun with life extra at the moment. However understanding my monetary habits since graduating in 1999, I’ll most likely simply find yourself investing the cash anyway.
In the event you’re a mother or father 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 below the property tax threshold, take into account contributing as much as the present tax restrict anyway. Encourage your accomplice and the grandparents to do the identical.
With these adjustments, the 529 plan has turn into one of many strongest generational wealth switch automobiles accessible. Moderately than merely gifting money, you’re passing down the chance for schooling, one thing that may be much more helpful over a lifetime.
Reader 529 Plan Questions
Readers, are you as pumped as I’m which you can now use $20,000 a 12 months 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 among the finest instruments to fund your little one’s schooling tax-efficiently. However don’t cease there. Diversifying your loved ones’s portfolio past schooling financial savings is simply as vital, particularly if you wish to give your youngsters optionality and monetary safety it doesn’t matter what path they select.
That’s why I’ve additionally invested in actual property via Fundrise, a platform that permits you to passively put money into a diversified portfolio of residential and industrial properties. With over $3 billion in belongings below administration, Fundrise focuses on Sunbelt markets the place valuations are extra engaging and yields are usually greater—an interesting hedge towards inflation and market volatility.
It’s also possible to put money into Fundrise Enterprise, which gives publicity to non-public AI corporations like OpenAI, Anthropic, and Databricks. With AI poised to reshape the job market and your kids’s future profession prospects, I wish to ensure that 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 keen to take a position $400,000+ in a 529 plan per child, I must also be keen to take a position at the very least $400,000 in non-public AI corporations 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.
