By Dr. Jim Dahle, WCI FounderI keep running into discussions relating to 529 accounts that make me shake my head for various reasons. The whole point of a 529 is relatively straightforward. It is a tax-advantaged account used to save for education. Like a Roth IRA, after-tax money is contributed, and principal and earnings come out tax-free and penalty-free when used for approved education expenses. Many states offer an additional deduction or credit for contributions up to a certain amount.
Straightforward, right? You would think so. Until you talk to people who are actually using these things. Nobody seems to be using them the way I use them, which I would argue is the way they were intended to be used. I manage more 529s than anyone I know. I have 35 of them. I contributed to 30 of them this year, and I am withdrawing money from about six. I've been contributing to 529s for over a decade and withdrawing from them for at least four or five years. I know the ins and outs of how to use a 529.
It's a college savings account. It works well. But here are three things you may not know about this subject that I think you should.
#1 College Costs What You Are Willing to Pay
College, like automobiles and weddings, costs what you are willing to pay. Include K-12 in that total, and it's entirely possible to get the educational bill for one child up to $1.5 million. Just pay $48,000 a year from kindergarten to 12th grade, $100,000 a year at an Ivy League, and $120,000 for some ridiculously expensive dental school. It's possible, right?
On the other hand, the tuition bill at most of the schools in my state, including my alma mater, ranges from $3,000-$13,000 a year. Add in living expenses and the cost of attendance is in the $18,000-$28,000 per year range, cheaper if you live at home.
It's really up to you. You can spend $100,000 educating a child, or you can spend $1.5 million. Does the $1.5 million get you a 15X better education? No, it does not. It may get you a better education, maybe 15% better. But it's definitely not 15X better. There's no way the ROI is there to spend an extra $1.4 million for the vast majority of pupils. Ask your 18-year-olds if they would rather have had a private school education or $1.5 million handed to them as they left home. I can tell you what mine would choose. (No, they're not getting $1.5 million in their 20s funds.) Remember, $1.5 million at 18 will double a lot of times before age 65.
=FV(8%,47,-1500000) = $56 million
Even using a more reasonable 5% real, that's still $15 million. Talk about generational wealth.
#2 The 529 Doesn't Have to Pay for Everything
You don't actually have to save up for college in advance. At inexpensive schools, many doctors can afford to cash flow the entire cost of education as they go. No advanced saving is needed at all. Plus, many kids will qualify for scholarships. They may work during the school year or during the summers. Some people even think it's good for the kids to have a small loan or two to pay off afterward to teach responsibility and to have a little skin in the game.
But the 529 fanatics don't seem to know or care about any of that stuff. They think that it all has to be saved in advance and that it has to all be there on the day the kids start college. No, if you go to school for 4-8 years, that's 4-8 years more that your money will be working for you. And it's not like colleges only accept 529 money. I assure you that if you sell a few ETF shares from your taxable account and write them a check, they'll cash it.
More information here:
When Is It Too Late to Contribute to a 529?
3 Reasons Why You Can Take More Risk with a 529
Despite Our Student Loan Debt, Here’s How We’re Filling Our Kids’ 529s
#3 You Cannot Max Out 529s
I see people trying to max out 529s all the time. Here's an example:
“First time contributor to Utah's my529, I am the account owner. My spouse and I are trying to contribute the full gift tax exclusion for 2024, but trying to figure out if we need to file IRS form 709 in the following cases:
1. I contribute $36,000 as the account owner from a joint checking account with my spouse directly
2. I contribute $18,000 as the account owner and send my wife the ‘gift link' for her to contribute her $18,000, all from the same joint checking account?”
Other examples include people trying to contribute five years' worth of contributions all at once (which is allowed) and people starting 529s in the parent's name before the kids are even born and then later changing the beneficiary to the kid if and when they have a child. Sometimes, these people don't even have a romantic partner yet. It's like they're worried about one of two things:
- They won't have enough to pay for college or
- They won't be able to max out the benefits of a 529
If the concern is the former, I would refer you to #1 and #2 above. And we can do some basic math, too. Let's say you contribute $18,000 per year for 18 years and it earns 8% a year. What will that likely be worth in 18 years?
=FV(8%,18,-18000) = $674,104
That's almost $700,000 at the beginning of college. It might be over a million by the time they finish their education unless they're one of those rare folks who go to a really expensive undergraduate school followed by dental school and never qualify for any sort of scholarship. Most people aren't going to figure out a way to spend $700,000 on their education.
No need to start before they're born. No need to somehow get more in there than the gift tax exclusion limit for the year [$19,000 per person for 2025].
A Personal Example
Allow me to share a very personal example of how easy it can be for a doc to save up more than enough for college. As I write this in December 2024, I have a high school senior who is choosing between a school with a cost of attendance of $22,000 a year and one for $28,000 a year but who will likely qualify for a significant scholarship at both places. She has $166,000 in her 529—$101,000 of contributions and $65,000 worth of gains. Barring a change in her educational plans to something like dentistry, she clearly already has an overfunded 529.
It's entirely possible she will graduate from college with a 529 worth over $200,000. How did it get to $166,000? Pretty boring actually. It's been invested in the Utah 529 in an aggressive 100% stock allocation. The allocation has mostly been:
- 50% Vanguard Total International Stock Market Index Fund
- 25% Vanguard Small Cap Value Index Fund
- 25% DFA Small Cap Value Index Fund
Contributions were as follows:
- 2007: $2,000
- 2008: $2,000
- 2009: $2,000
- 2012: $95.10
- 2013: $3,680
- 2014: $3,720
- 2015: $3,800
- 2016: $3,800
- 2017: $4,000
- 2018: $15,000
- 2019: $15,000
- 2020: $15,000
- 2021: $15,000
- 2022: $16,000
Weird transaction history, right? The first three years were actually to a Coverdell ESA. That was before we were Utah residents and qualified for a 529 tax break. Then we basically didn't contribute for three years. For the next five years, we contributed the maximum amount that would qualify for a Utah state tax credit.
In 2018, our eldest started talking about medical school and we had a lot more income, so we started making a contribution equal to the gift tax exclusion limit for one of us. That continued for five years. In 2023, we realized we were likely already overfunded in all the 529s and quit contributing to them. The moral of the story is that even if you can't put all that much in there for a lot of years or if you start late or don't invest it exactly right, you can still get to a six-figure 529 without too much trouble. Certainly, it can be done without any heroic efforts or secret loopholes.
What Is the Real Max?
Now, let's talk about the latter issue, i.e. those people worried about not maxing out the potential benefits of a 529. Let's talk about what the REAL max is for a 529, and no, we're not going to mess with the complicated math involved in doing five years of contributions at once (aka superfunding it), which would further boost these totals. Let's say both you and your spouse open a 529 in your state for your child. And you BOTH put the 2024 gift tax exclusion amount in there every year from birth to age 18. As shown above, the equation looks like this:
=FV(8%,18,-18000) = $674,104
Double that and you get to nearly $1.35 million. That's enough to cover 13 years of expensive K-12, the most expensive college in the country, and four years of dental school. But the truth is that your 529 wouldn't let you put that much into it. They all have a “maximum amount” after which you are no longer allowed to contribute to the 529. In Utah in 2024, that amount is $574,000. Once the account hits that amount, you can no longer make additional contributions to it. But that's a Utah-specific amount. And each state has its own and doesn't care how much you have in 529s of another state. If Utah will no longer let you contribute, you just go down the (online) road and open a Nevada 529 and contribute there.
In fact, there's nothing keeping you from doing that from day 1. Sure, there's the gift tax thing, but the truth is there is no actual tax associated with a gift tax return until you use up your estate tax exclusion amount. In 2025, that amount is $13.99 million per person and $27.98 million for a couple. That's right. You can contribute over $27 million to 529s for your precious little darling before you have to pay any gift taxes on it.
If you open two accounts in all 50 states and put $18,000 into each one for 15 years, how much will it grow?
=FV(8%,15,-36000*50) = $49 million
Let it grow for another three years, and they'll have $62 million. By the time they graduate from dental school, they'll have $115 million in there. Let it ride for 30 years until the dentist's kids are ready to start college, and there'll be $1.16 billion in 529s.
What's my point? My point is you aren't even CLOSE to maxing out the benefits of 529s, so quit trying. If you're not using the money for college, you're probably better off investing it in a taxable account anyway. It has lower fees, long-term capital gains tax treatment, and no 10% penalty. I suppose if you don't know how to invest tax-efficiently in a taxable account, it's entirely possible that you'll come out ahead using 529s to create generational wealth despite the additional fees, taxes, and penalties. But that's nothing compared to the complexity of managing 100 529 accounts across 50 states. And imagine if you have more than one kid.
More information here:
How Much Should You Sacrifice to Pay for Your Child’s Medical School Education?
Don't Invest for Retirement in a 529
Not convinced? Want to see the numbers showing 529s aren't for non-college costs? OK, let's run the numbers. Let's compare investing for 40 years in a taxable account to investing for 40 years in a 529. Let's assume a 23.8% LTCG and qualified dividend rate and a 37% ordinary income tax rate. We're going to ignore ACA subsidies and IRMAA. We'll assume a 529 fee of 0.11% and 8% pre-fee, pre-tax returns. Returns in the 529 will be 8%-0.11% and the returns in the taxable account will be 8% – 23.8% * a dividend yield of 2% or 7.52%.
You've got $1 million you can either invest in a very simple way in taxable or you can invest it across a bunch of 529s.
Taxable
=FV(7.52%,40,0,-1000000) = $18.179 million
The basis is probably something like $2 million so applying 23.8% to $16.179 million leaves us with an after-tax total of roughly $14.3 million.
529
=FV(7.89%,40,0,-1000000) = $20.9 million
Apply the 37% tax rate and 10% penalty to all but the first million and you get $11.5 million
You come out $3 million behind using the 529, and that's giving the 529 every benefit of the doubt I could. That doesn't even consider all the “tricks” of a taxable account, like tax-loss harvesting, donating appreciated shares to charity, and the step up in basis at death. No, it does not make sense to save for non-educational expenses in a 529.
What to Do with an Overfunded 529
The best use for an overfunded 529 is to change the beneficiary and use it for the new beneficiary's education. In our case, assuming our kids have kids, their overfunded 529s will be a significant (or possibly complete) college savings fund for the grandkids. There are other options, though. If your kid gets a scholarship, you can withdraw an equivalent amount from the 529. The Secure Act 2.0 introduced a $35,000 529 to beneficiary Roth IRA rollover, which can be a big help with slightly overfunded 529s. Otherwise, the option is to withdraw the money, pay the taxes and penalty, and buy a sailboat with it.
The Bottom Line
The next time you start hearing someone spewing 529 insanity, remember these principles:
- 529s are college savings vehicles.
- Save for retirement first (Your kids can get loans for college just like you did, but you can't get loans for retirement. If you're on track for your retirement goals, then you can save some for college, too).
- College costs what you're willing to pay.
- The 529 doesn't have to pay for everything.
- You cannot max out 529s.
- Those 529 insanity proponents are going to have some tough overfunded 529 decisions to make in a few decades.
Nod your head, and move on to the next conversation.
What do you think? Why do people get so carried away with acquiring huge 529s? What's your 529 savings goal and how close are you to reaching it? How did you set that amount? Have you opened more than one 529 for a single child? Why or why not?
Nearing the end of our own 529 uses. (Yay!) Started a little late, but had enough to comfortably fund undergrad for all of the kids and even help with a year of medical school for one. Our 27-year old son (not a doctor) is maxing out his savings vehicles, owns a condo with a modest mortgage (basically the equivalent of renting and definitely not his forever home), owns his car outright…yet, still has surplus money. Not a spender, lives frugally by choice and no spouse or kids yet. I’ve suggested he throw a small amount each month into a 529. (Just up to the state’s tax benefit.) Why? Because I remember how challenging it was as a young family to budget for education. Doing it now (while he’s got the extra cash) could offer breathing room during the early years of family life. (God willing.)
Few 27 year olds have everything else going well enough to justify such an action, but yours might.
If you have leftover 529 funds, you can use $7000/year for five years for Roth contributions for your beneficiaries. ( limit $35,000 and account must be active for 15 years.
A good exit plan for a slightly overfunded 529.
Anyone know if you can contribute to a 529 for the state tax deduction and then immediately withdraw the $ to reimburse yourself for PAST expenses (ie that you’ve already paid for)? Does it matter if that past expense is in prior or the same year as the contribution?
The withdrawal has to be in the same calendar year as the expense
No it does not. This advice gets thrown around a lot, but there is absolutely no law, rule, regulation, or IRS ruling that states that requirement. Show me where this is required.
Are you arguing that you can withdraw money from your 529 in 2028 using a receipt from 2025? I’m pretty sure that’s not true. And at least a dozen websites state so. But I also couldn’t find it specifically spelled out by the IRS. This site says:
https://www.savingforcollege.com/article/timing-of-529-plan-distributions-must-match-qualified-expenses
So maybe you’re right. But without more clear guidance, I don’t think I’d hold receipts for years like people do with HSAs.
Yes I know. No you can’t do it.
Yes it matters.
But you could theoretically contribute money in Dec 2025 for expenses you paid in January 2025, correct?
Yes. You just have to withdraw it in 2025.
My parents are transferring me the 529s they funded for my 2 older sons (freshman in college and sophomore in HS). The accounts are with a brokerage firm that uses Fidelity for its accounts and have about 25K in them. I saved additional money for the older son lover the last year or 2 and put it in a MMF at Schwab. We live in Texas, so I was planning to rollover transfer them to a Utah my529 plan. I have 2 questions:
1. For the son going to college this fall – Am I understand the above that when his tuition and fees bill comes to us that I could move some of the MMF I have saved to the account and then use it to pay the bill(s)? Is there any significant benefit to that?
2. I am curious what changes, if any, you made to your daughter’s asset allocation (she is about my son’s age). He did get an out-of-state fee waiver and also is transferring 32 hours from dual enrollments HS classes. I am planning to pay approx 120K-150K toward college/trade school/business start up and early life for all 4 of my sons. I was thinking that I would stay aggressive until at least my second son was mid way through college (about 2030).
1. Not much of one for a Texan.
2. We keep the 529s invested aggressively, even during college. So no change in AA.
There is one scenario for which you can do this, and it is student loan repayment with an individual lifetime limit of $10K.
I believe people who a proponent for super funding a 529 calculate the growth in the 529 differently. If you use the money for grandkids’ education (or siblings, cousins, nephews/nieces, or great grandchildren, which is allowed), there is never a tax on the earning or a penalty. It is like a Roth but a dynasty Roth because you are never required to take the money out and it can grow tax free forever as along as you use it to pay for education for one of your relatives or future relatives. You have to be aware of stay within the gifting limits and rules. Micheal Kitces’ website has an article discussing this topic called “Using a family dynasty 529 plan for multigenerational college planning”, referring to a dynasty 529 plan with the potential for perpetual tax-free growth
So long as it eventually gets spent on education it’s a great idea.
There are gift tax consequences every time you change generation, but so long as the estate tax exemption remains very high that shouldn’t be too big a deal.
Why in the world would you have 35 529 plans?
I had a 529 for each of 5 children. All went to state university and I saved some but cash flowed the rest. All balances are now zero. I give $ for the grandkids 529 but the parents have opened their own accounts for them, no need for me to manage that. It’s a vehicle for college savings, but that’s all it is.
I have one for each of my nieces and nephews. And Katie and I are both one of six mostly fertile siblings.
Great article as always. How would use the 529 best if kids start going to private school in high school? Cash flow the private high school and continue to invest/let grow the 529 for college or use it all up and then hope to cash-flow/loans the college?
Everything I could I would run through the 529 if it were going to sit there for any length of time at all and certainly the amount that gets the max state tax break.
5 years of $15k / year contributions is quite good. For many who can’t afford that and are doing $200-600 / month better to start early to allow compounding tax free growth. I started saving before my child was born and now have a six figure 529 with four years before college starts.
Now I’m doing more taxable investing to give more flexibility if they don’t go to an expensive school. The dilemma is whether to back off on stock risk — I know you’re a proponent of 100% stocks in a 529.
Like you said college costs can be as much as you want, but there is some benefit to getting more to have the option for the expensive places or for grad school. There’s always the dilemma of stock risk with a 50% drop right before school starts. For most in this site we have a relatively high income as a doctor (but not like a website owner) but always malpractice, burnout, etc so if you have an overfunded 529 removes that worry about paying for children’s education.
I moved my 529s to money market around a year or so within that child starting college. I’d had 18 plus years of growth so no need to take a risk of market correction that close to needing the money.
I had a revelation a while back that the 529 account should be treated like a retirement acct in terms of your timing for asset allocation/risk because when your child starts college that’s when you start withdrawing. Because we have quite a few years to go before college, I’ve been aggressive (100% stocks/total stock market). But I’ve made a note to myself to transfer most of the $ to “tuition track” (for my state it keeps up with tuition inflation) when the kids are about 13 years old in order to protect against a big market downturn during their college years…. Kind of like increasing your bond allocation before retirement. In my state’s plan, you can transfer funds within the 529 from one selection to next but can only do it 2x a year (I guess it would be even more flexible if you did it thru a brokerage). This is only if the 529 is barely funded…. Kind of irrelevant if it’s super funded. It’s kind of just fun to think about and I’ve gone down the dynasty 529 rabbit hole mostly as a thought experiment. Let me know if I’ve got it wrong.
Could you explain the asset allocation for the 529? I know you wrote a whole post about why you invest it aggressively, but can’t recall if you have listed the actual funds before. Specifically, I’m curious why you forgo a Total Stock Market or Large Cap fund.
It seems stupid when looking through the retrospectoscope obviously to not have most of it in US large cap stocks. But back when we moved it to 529s in 2011ish I decided to just be very aggressive. So 100% stocks. I split it 50% US and 50% international. There was no great international small value fund in the Utah 529 so we just used small value on the domestic side. So 50% “total stock” and 50% “small value” is where we ended up. Obviously both of those asset classes underperformed US large caps over the last 15 years, but who knows going forward.
The cousin 529s were 50% TSM and 50% TISM. Our HSA is 100% TSM. Our retirement accounts are 60% stock (25% TSM, 15% TISM, 15% SV, 5% ISV), 20% bonds, 20% real estate. Different goals, different asset allocations. When I say my crystal ball is cloudy, I mean it.
Some of my kids’ 529 money won’t be spent for at least 15 more years. Heck, most of it won’t be spent for 25-40 years when the grandkids come around. I do expect the pendulum to swing from TSM to international and SV at some point before then. And if I’m wrong, that’s okay too.
I am on the path to have over-funded 529’s for my two children. My hope is that whatever money they do not use will be reappropriated to our future grandchildren. What happens if both my wife and I die unexpectedly prior to changing the beneficiary? Who would be the default executor? Would this go through probate?
I think the executor of your will could name a new owner. Personally, I’d have my kids be the owners of our kids’ 529s after my spouse. And our siblings of the cousin 529s.
I think for those of us in lower paying fields (peds) who don’t have the luxury of superfunding there is some consternation around the 529s. At least for many I would assume that what you put in the 529 is what you’re able to allocate for college so if you are under your kids college costs all you can afford to cashflow is what you are putting into your 529.
That’s certainly what we did for many years. Retirement is definitely a bigger priority than college. You can best help others from a position of strength.
So there is a max. 1.16B. Maybe more if we do this for multiple kids. Challenge accepted.
Lol. Good luck.
My wife and I plan on using the extra 529 money to go back to school. Maybe a cooking school in Paris. A summer cruise up the Seine, etc….
Anybody out there that does not want to go to a retirement home go back to college. We would have food, shelter, entertainment, great healthcare, transportation on campus and it would cost less then a retirement home. I would recommend fall semester at University of Michigan and winter semester at Arizona State.
A May term in Florence, a June term in Spain then the following fall University of Washington, following winter Miami.
Not sure a summer cruise up the Seine is going to qualify. Paris cooking school may not qualify either. There is a list of approved institutions somewhere. Maybe this is it:
https://studentaid.gov/fafsa-apply/colleges
More info here:
https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eligible-educational-inst
https://ope.ed.gov/dapip/#/home
This might be the best list for foreign schools:
https://studentaid.gov/sites/default/files/international-schools-in-federal-loan-programs.pdf
But then you would have to be around obnoxious college kids.
I would prefer a nursing home.
For some states, it may make sense to start a 529 before kids to take advantage of any tax deductions and stretch the contributions over a longer period of time. In the case of NY, 529 contributions can be deducted up to a cap of 5k.
You could always use the 529 towards yourself like going back to school.
I disagree that anyone needs that level of optimization of their finances. I suspect anyone that doesn’t yet have kids has a better use for their money (including spending it) than starting a 529 for a being that doesn’t even exist yet.
During covid chaos paid OSU directly as they were messed up only classes on line everyone holed up, tried to write off 2018 & 2019 IRS denied both yrs I just couldn’t believe this since the whole world was in turmoil. Any thoughts?
Not sure what you’re saying or asking. You mean you tried to withdraw 529 money in 2020+ for expenses in 2018-2019? No, you can’t do that.
now that I have saved religiously for years and years, my kids are about 10 and I wonder what to do if I have “over saved”, meaning perhaps they aren’t college material. Short of converting it to an IRA for them I really don’t know what to do. Yes, I know I have years and years before I have to worry about this.
You can pull it out and pay taxes on it.
You can leave it there and change the beneficiary.
You can move $35K into their Roth IRAs.
That’s it.
We have 3 kids (ages 8, 12, 14) each with a 529 which are all 100% invested in equities. This has worked well for us so far but our oldest is now 14. Since our invest strategy currently is not age-based, “should” I convert some money for the oldest child to more conservative investments approaching college age?
My original plan was if we hit a bear market as he enters college (or during college) I would simply add cash or transfer funds from other kids as needed assuming market should recover over next 4-8 years. But maybe this is too naive/risky? Thoughts? Thanks everyone.
Either way is fine. We’ve left all ours 100% stocks since the consequences of loss are small enough we can afford them. But lots of people move towards cash as the kids age.
https://www.whitecoatinvestor.com/3-reasons-why-you-can-take-more-risk-with-a-529/
With new Trump bill, when can you use 20000 per year from 529 for private K-12 tuition? This year or 2026?
Still digesting it and a quick Google search didn’t answer your question.