Saving for kid's college education with 529 plans

Table of Contents
  1. How To Pay for a Child’s College Education for $7000

529 Plans

Named for a section of the Internal Revenue Code (IRC), 529 plans are tax-deferred savings plans designed to help pay for college expenses. In some states, qualified withdrawals for these costs are not subject to federal or state taxes.

  1. https://www.investopedia.com/terms/1/529plan.asp
  2. Tips for Creating a 529 Plan: https://www.investopedia.com/articles/personal-finance/040115/top-7-mistakes-avoid-your-529-plan.asp
  3. 529 Risks to Take (or Not): https://www.investopedia.com/articles/personal-finance/091714/529-risks-take-or-not.asp
  4. 529 Strategies That Maximize Student Aid Options: https://www.investopedia.com/articles/personal-finance/061616/529-strateges-maximize-student-aid-options.asp
  5. More than One Child? Does Each Need a Separate 529 Plan? https://www.investopedia.com/more-than-one-child-does-each-need-a-separate-529-plan-4782663

Could Saving Too Much For College Be a Problem? Not Anymore

December 16, 2024

Sending your kids to college is usually a huge financial undertaking. Four years of tuition can easily cost over six figures, and then there’s room and board, books, a laptop, and more.

But what happens if you’ve been diligently saving up, using a tax-advantaged 529 plan like everyone recommends, and then your kid’s plans change? What if they decide to live at home, drop out, or not go to college at all? Or, what if by some miracle tuition gets cheaper over the next decade? Do you have to pay a penalty on the funds you don’t use for their education?

Thanks to a change in the tax rules this year, the answer doesn’t have to be no. Here’s what’s changed and why you can rest easier if it turns out you’ve set too much aside.

  1. https://www.irs.gov/publications/p590a

The Surprising Way to Superfund Your Child’s 529 Plan Without a Penalty

https://www.investopedia.com/superfund-a-529-plan-without-a-penalty-11698970

By Dorothy Neufeld - Dorothy Neufeld is currently a financial writer for Visual Capitalist. She has 5+ years of writing experience.

Updated April 11, 2025

Fact checked by Suzanne Kvilhaug

Setting up a 529 account is one of the most tax-efficient ways to save for a child’s education. Superfunding such an account—making a lump-sum contribution of up to $95,000 if you’re giving as an individual ($190,000 if you’re giving as a couple) that’s spread across five years.

That loophole allows you to give funds that aren’t counted against your lifetime gift tax exemption limit.1 Internal Revenue Service. “Various 2025 Tax Year Limitations.” Page 4.

To qualify for this strategy, you must contribute at least $19,000. And the contributions can even reduce your taxable estate. Here’s what you need to know.

Key Takeaways

  1. In 2025, the maximum contribution for superfunding a 529 account per child is $95,000 for an individual, or $190,000 for a couple.
  2. Contributions must be higher than $19,000, or else they will not be eligible for the five-year gift-tax averaging rule.
  3. Superfunding allows parents, grandparents, relatives, or friends to set up an education savings account that enables contributions to grow tax-free while reducing their taxable estate.

Strategies for Superfunding a 529 Account

Today, the average cost for private, non-profit college tuition is $234,512 over four years, with tuition costs growing by more than twofold since 2000. To make progress toward a child’s education costs, the 529 allows you to save for the following expenses:

  1. Undergraduate degrees
  2. Qualifying graduate degrees
  3. Trade school
  4. Kindergarten to grade 12 (annual limit: $10,000)3

As educational costs continue to rise, here are some useful tips for superfunding a 529 account.

1. Know Your Contribution Limits

In 2025, if you’re giving as an individual, the most you can contribute while superfunding a 529 account is $95,000 over five years, up from $90,000 in 2024. For married couples, the most both can contribute is $190,000.

Each person must file IRS Form 709: Gift Tax Return individually for gift tax purposes. For each individual, this contribution is averaged across five years, with up to $19,000 contributed each year over the period ($19,000 x 5 = $95,000).

In addition, the contribution must be more than $19,000 in order to be eligible for the five-year tax averaging rule.

5 Years The period of time required to use the superfunding trick for a 529 account.

It’s worth noting that it’s important to consider other gifts that have been given over the year, which will reduce the amount that can be used in this account. For instance, if someone gifted $3,000 in stock awards in a year, the annual 529 eligible amount would decrease to $16,000.

2. Prepare for Future Contributions

The annual limit typically rises over time. In 2022, for example, it was $16,000 per year. In 2025, it’s $19,000.

If the annual limit is raised, it provides you the opportunity to contribute more to your 529 account. For example, let’s say you decided to contribute the maximum $90,000 in 2024 over five years ($90,000 / 5 = $18,000 per year). In 2025, you can contribute another $1,000 and still stay within the annual limit of $19,000. (However, you cannot make a lump-sum contribution of $5,000 in 2025, since this would then exceed the annual limit of $19,000.)

3. Withdraw All Funds Prior to Graduation - or Transfer Up to $35,000 to a Roth IRA

When you exhaust the funds in a 529 account by graduation, you can avoid the penalty for withdrawing unused funds, which is a 10% penalty set by the Internal Revenue Service (IRS). Keep in mind, however, that the rules for 529 plans are treated differently from state to state.

For withdrawals, it’s important to plan carefully. Here are the qualifying expenses that can be used with this account:

  1. Tuition and fees
  2. Room and board for half-time or more educational enrollment
  3. Tutoring and other services
  4. Books, computers, and equipment such as software

In some cases, there are exceptions to withdrawals that waive the 10% IRS penalty. (However, income taxes still apply to any earnings made on the distribution.) These exceptions include:

  1. The beneficiary receives a tax-free scholarship
  2. The beneficiary attends a U.S. Military Academy
  3. The beneficiary is provided assistance from a qualifying employer program
  4. The beneficiary becomes disabled
  5. The beneficiary dies

In addition, it is possible to roll over 529 funds into a Roth individual retirement account (IRA). The lifetime maximum is $35,000, and the 529 account must have been open for a minimum of 15 years.

The Bottom Line

Superfunding a 529 account offers many tax advantages. Unlike a traditional savings account, withdrawals from a 529 plan are tax-free. In addition, income earned in the account is not subject to capital gains tax when an investment is sold, making it an attractive tool for setting up a child’s long-term success.

Benefits of Using a 529 College Savings Plan

https://www.sofi.com/learn/content/benefits-of-529-college-savings-plan/

By Janet Siroto.

January 09, 2025

The growing cost of college means that parents or grandparents who intend to pay part or all of the tab for a child need to chart a course. A tax-advantaged 529 college savings plan is one way to save for future education costs.

Although 529 plans have been around since 1996, many parents still aren’t sure how they work. Yet they are worth knowing about in detail, as they can be used for a variety of educational expenses and are not subject to federal taxes.

Read on to learn more on 529 plans and whether opening one is the right move for you.

Key Points

  1. With a 529 plan, contributions grow tax-free, and withdrawals for qualified education expenses are not subject to federal taxes.
  2. Funds can be used for a variety of education-related expenses, including tuition, room and board, and even K-12 tuition in some cases.
  3. Many states offer high or no contribution limits, allowing substantial savings over time.
  4. Assets in a 529 plan have a relatively low impact on federal financial aid eligibility, as they are considered parental assets.
  5. Some states offer tax deductions or credits for contributions to a 529 plan, providing additional incentives for saving.

529 Plan Basics

A 529 plan is a tax-advantaged savings account designed to help families save for education expenses. Contributions grow tax-free, and withdrawals for qualified expenses, such as tuition, books, and room and board, are also tax-free. Many states offer additional tax benefits for residents who contribute to their state’s plan.

Funds can be used for various educational institutions, including colleges, universities, trade schools, and even some K-12 expenses. 529 plans offer flexibility and can be transferred to other family members, if needed. There are two types of 529 plans: prepaid tuition plans and education savings plans, each with unique benefits.

Prepaid Tuition Plan

A prepaid tuition plan allows you to prepay tuition and fees at certain colleges and universities at today’s prices for a child’s future educational needs. Such plans are usually available only at public schools and for in-state students. Only nine are accepting new applicants, and the funds saved are typically not able to be used for room and board.

The main benefit of a prepaid college plan is that you could save big on the price of college by prepaying before prices go up. And contributions are considered gifts, so deposits up to a certain threshold each year ($19,000 in 2025, or $38,000 for a married couple splitting gifts) qualify for the annual and lifetime gift tax exclusion.

A few special-case guidelines to note:

  1. If your child doesn’t attend a participating college or university, you will likely be able to use the funds you set aside at another school. Another option may be to transfer the plan to an eligible sibling. If no one in the family plans on attending college, most plans will refund your money, perhaps minus a cancellation fee.
  2. If your state government doesn’t guarantee the plan, you may lose the payments you’ve made if the state runs into budget shortfalls.
  3. Prepaid tuition plans may charge an enrollment fee and ongoing administrative fees.
  4. Although most of the plans can’t be used for room and board, Florida Prepaid Plans, for example, offer a prepaid dormitory plan of two semesters of dorm fees for each year of state university coverage.

An alternative to the state-sponsored plans is the Private College 529 Plan, which has over 300 participating institutions nationwide. The Private College 529 Plan is a prepaid tuition plan specifically designed for private colleges and universities. It allows families to lock in current tuition rates at participating private institutions, protecting against future tuition increases.

Education Savings Plan

The second type of 529 plan is an education savings plan. Here’s how it works:

  1. You can contribute monthly, quarterly, or annually, or deposit a lump sum. Beyond parents making regular payments, 529 plans can be a clever way for the extended family to give a meaningful gift on birthdays or holidays. There is no limit on how much you can add yearly, but you’ll have to fill out gift tax Form 709 if you contribute more than the annual gift amount.
  2. While contributions are not deductible on the federal level, many states provide tax benefits for saving in a 529 plan, such as deducting contributions from state income taxes or giving matching grants. Check your local tax laws to see if you qualify.
  3. Once you contribute, you will likely have a range of investment options to choose from. These vary from state to state and may include mutual funds and exchange-traded funds (ETFs).
  4. You may want to tailor your choices to the date you expect to withdraw the money. You can possibly be more aggressive if you have a longer timeline, but may sway more conservatively if you only have a few years.
  5. Money can be withdrawn tax-free from a 529 savings plan to pay for any “qualified higher education expense,” which includes tuition, fees, books, computers, and room and board.
  6. You can make withdrawals as long as your child is enrolled at least half-time at an accredited school, regardless of where in the United States it is, and occasionally abroad. Parents can also withdraw up to $10,000 a year to pay for K-12 tuition expenses and for student loan repayment.
  7. If you withdraw money for the above expenses, you won’t have to pay federal income tax, and often state income tax, on your earnings. If you withdraw the funds for other reasons, you’ll have to pay taxes, and you may or may not be able to avoid the 529 withdrawal penalty, a 10% federal tax penalty on the earnings.
  8. Starting in 2024, families with leftover savings in a 529 college savings account may be able to roll it to a Roth IRA tax- and penalty-free. That is one of several retirement savings changes that are part of the Secure 2.0 Act.

One last note: It is possible to change the beneficiary of a 529 plan to another eligible family member. For example, you can switch to a younger child if your oldest got a scholarship.

How 529 Savings Plans Compare With Other Options

When planning for education expenses, 529 savings plans are a popular choice due to their tax advantages and flexibility. However, other options are available, each with unique benefits and limitations. Comparing a 529 plan to alternatives like a Coverdell Education Savings Account, basic brokerage account, traditional IRA, Roth IRA, or UGMA/UTMA account can help families choose the best strategy.

Coverdell Account

Like a 529 plan, a Coverdell account, also called an Education Savings Account (ESA), is a tax-advantaged savings account to pay for qualified education expenses.

Unlike a 529 account, total contributions from all sources to a Coverdell account cannot exceed $2,000 annually per beneficiary. Another difference is income limits: You can only use an ESA if your modified adjusted gross income is less than $110,000 (singles) or $220,000 (married couples filing jointly).

You can only make contributions until the child reaches age 18, and all funds must be withdrawn by the time the beneficiary reaches age 30. A 529 plan generally does not restrict the age of the beneficiary.

Basic Brokerage Account

Instead of a 529 plan, some families may favor a brokerage account, which affords the freedom to choose whatever investments they want and the ability to use proceeds for any need a young person has.

The main benefit of a 529 plan is that you don’t have to pay capital gains tax on any distributions used for qualified education expenses. Many families, however, pay a 0% long-term capital gains tax rate anyway. (Long-term capital gains apply to a security held for a year or more. The day-to-day increases or decreases in an asset’s value before it is sold are unrealized gains and losses.)

For 2025, married couples filing jointly with taxable income of $96,700 or less and single filers making $48,350 or less may qualify for the 0% long-term capital gains rate.

A 529 account, then, may be of greatest use to families that need an additional tax shelter.

Traditional IRA

Withdrawals from a traditional IRA before age 59 ½ that are used for qualified higher education expenses are not subject to the 10% early distribution penalty — but you will still pay income tax on the distribution.

Money in a qualified retirement plan is not reported on the FAFSA®, but distributions may be reported as untaxed income, and income is weighted much more heavily than assets for financial aid. Remember that a 529 savings plan will have a limited impact on the financial aid offer a student receives.

It is generally thought that retirement plans should be used for just that, and not for college expenses.

Roth IRA

With a Roth IRA, you can withdraw contributions tax- and penalty-free at any time, but distributions will be reported as untaxed income on the FAFSA, reducing eligibility for need-based financial aid.

You generally must be at least age 59½ and have had the Roth account for at least five years to withdraw earnings tax- and penalty-free. If you are under 59½, you may be able to avoid a penalty (but not taxes) if you withdraw earnings to pay for qualified education expenses.

Some people opt to max out their Roth IRA contributions and then invest additional money in a 529 plan.

UGMA and UTMA Accounts

You can open a Uniform Gifts to Minors Act or Uniform Transfers to Minors Act account on behalf of a child under age 18. The adult custodian controls the money, but gifts and transfers irrevocably become the property of the child.

As with a 529 plan, annual contributions to a UGMA or UTMA account are unlimited, and gifts below the annual gift threshold do not need to be reported to the IRS on gift tax Form 709.

Unlike college savings plans, there is no penalty if the account assets aren’t used to pay for college. Once the minor reaches adulthood, the money is turned over to the former minor, who can use the assets for college or anything else.

But custodial accounts have drawbacks when compared with 529 savings plans: The accounts offer no tax benefits when contributions are made. Earnings are subject to taxes. A custodial account is also counted as a student asset on the FAFSA and will weigh more heavily against financial aid eligibility than parents’ assets or assets held in a 529 account or an ESA.

Choosing a 529 Savings Plan

Every state offers a 529 savings plan, but not all are created equal. When trying to find the best 529 college savings plan, you may want to think about the tax benefits and the fees.

First, you may want to understand whether you qualify for a state income tax deduction or credit for your contributions, based on your state of residence and the plan. Check your state laws and consult a tax professional to learn more about your particular situation.

The next thing you could consider are the fees associated with your plan, which could include enrollment fees, annual maintenance fees, and asset management fees. Some states let you save on fees if you have a large balance, contribute automatically, are a state resident, or opt for electronic-only documents.

The Takeaway

For many students, the cost of college can be eased with a tax-advantaged 529 savings plan. The accounts allow for tax-free growth of funds that can help dreams of affording higher education come true.

529 plans are still rarely used, though, as most college students take on loans to get through school. Students can rely on both federal and private student loans, in addition to cash savings, scholarships, and grants.

FAQ

Are 529 plans worth it?

A 529 plan can be a worthwhile college savings vehicle, depending on a family’s situation. If the student is definitely going to attend college and if the state of residence offers tax benefits for these savings, or a prepaid tuition plan, it can be a good option.

Why shouldn’t you invest in a 529 plan?

For some people, a 529 may not be the best option. If a family is unsure whether a child will attend college, lives where there aren’t state-level tax breaks for these programs, or thinks they can earn higher returns elsewhere, they might not want to open a 529 college savings plan.

Is a 529 plan better than a savings account?

A savings account offers more flexibility than a 529 college savings plan, but it won’t offer the tax advantages that a 529 does. With a 529 account, contributions will grow tax-free, and withdrawals for qualified education expenses are also not subject to taxes.

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