As quickly as each my kids had been born in 2017 and 2019, I superfunded their 529 plans equal to the five-year reward tax exemption. On the time, I used to be thrilled to do it given a guardian’s primary duty is to supply for his or her kids.
Lastly, a tax-efficient solution 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 every year as properly. As soon as the five-year contribution window reset, I stored going, contributing as much as the annual reward tax restrict.
By June 2024, I hit a wall. I had reached my objective of funding 4 years of full-priced non-public college tuition in a 529 plan—sufficient to ideally match or outpace school value inflation. With that field checked, I abruptly felt adrift, like I had misplaced a key supply of objective. It was a mini parental existential crisis after fulfilling one of many greatest monetary duties we’ve got.
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. These days, I’ve had this recurring worry: think about finding out and paying 16 years’ price of tuition, solely to be replaced by AI. This case is occurring 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 larger than anticipated. And my son has 10 extra years of compounding to go earlier than he hits school. Will school actually value our household $750,000+ for 4 years when it is his time?
In hindsight, I might have directed extra of that capital into UGMA custodial accounts for better flexibility. Alternatively, I might have invested extra in my preferred private 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 yr! Ah, I want I had invested much more cash in non-public AI firms.
Might Have Lived It Up Extra At this time
Selfishly, I might’ve purchased a Lambo and YOLOed extra in mid-life as a degenerate poker participant in Vegas. It has been considered one of my desires. We might’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer season—and carried out the identical for a lot of summers to return. As a substitute, I made a decision to save cash and dwell with my mother and father.
Alternatively, we might have used his 529 plan cash to develop our household’s passive income portfolio by an extra $20,000 a yr to purchase extra time freedom as we speak. With much less cash locked right into a 529, we’d additionally really feel much less strain for our son to attend school in any respect.
Should you’re excited about having kids, are you actually ready to sacrifice your time, cash, and freedom for them? Elevating children isn’t low-cost—particularly if you wish to assist them go to school. Don’t let anybody let you know in any other case. Odds are, your little one gained’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 as we speak’s {dollars} for faculty, just for them to finish up in a minimal wage job, makes me a little bit sick.
I nonetheless keep 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 dwelling and doing the identical factor looks like an excessive amount of of a letdown. You don’t want a level to prepare dinner frozen meat patties.
Thankfully, the One Large Lovely Invoice Act (OBBBA) has made 529 plans extra useful going ahead. Right here’s what modified.
529 Plan Enhancements Underneath the OBBBA
I wrote concerning the OBBBA’s impact on FIRE seekers. Now let’s take a look at a extra detailed look on the OBBBA’s affect for folks saving for his or her kids’s schooling. Should you’ve been worrying that you simply overfunded your kids’s 529 plans, this submit ought to aid you really feel a little bit higher.
1. Broader Checklist of Certified Schooling Bills
Part 70413 of the OBBBA expands what’s thought-about a “certified schooling expense,” significantly for Ok–12 college students. Right here’s what’s now lined beginning July 4, 2025:
- Tuition for public, non-public, or spiritual Ok–12 faculties
- Curriculum and tutorial 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 so on.)
- Twin-enrollment school course charges
- Academic therapies for college kids with disabilities
Primarily based on this expanded record of certified schooling bills, it positive looks like nearly something goes. And I am unsure 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. Similar factor when you spend $1,000 on AI programs to assist increase your kid’s productiveness.
Simply word: federal tax-free standing doesn’t all the time imply state tax-free. For instance, California doesn’t conform to the federal definition of certified bills. Should 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 Ok–12 eligible expense restrict from $10,000 to $20,000 per yr beginning in 2026. This helps households with children in non-public college or specialised applications pay extra out of their 529 tax-free. Whereas this gained’t have an effect on most households, it’s a win for a lot of households in huge cities paying for personal grade college.
For instance, non-public grade college in Honolulu prices round $33,000 a yr from Ok by means of 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 provides significant aid.
Take the classic $500,000 household with two children in non-public college costing $100,000 a yr complete. That’s roughly $150,000 in gross revenue going simply to tuition. After taxes, there web revenue after paying tuition would possibly solely be about $100,000 – $150,000 to pay for hire 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 avoid wasting 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 school?” 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 lined beneath 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 eradicate tens of millions of white-collar workplace jobs within the coming years, it’s clever to contemplate careers in additional AI-resistant industries.
Trades like plumbing and electrical work already supply six-figure revenue potential, and demand is simply rising. After spending over $40,000 remodeling an in-law unit in Honolulu, I’ve little doubt 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) — price as much as $2,500/yr for 4 years. You will get the complete credit score when you spend $4,000 out-of-pocket on tuition and costs. 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 certified distribution.
- If half your withdrawal ($4,000) got here from earnings, then $2,000 of earnings now turns into taxable revenue.
At a 22% tax fee, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination offers you choices when you’ve overfunded a 529 for certified academic bills or need to optimize your return. To make clear, the AOTC is a tax credit score — it immediately 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 Skill To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though having the ability to roll over unused 529 plan cash is because of the SECURE 2.0 Act, not the OBBBA, it is nonetheless price 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 supplies households with a useful solution to repurpose leftover schooling funds and kickstart a toddler’s retirement financial savings, tax- and penalty-free.
Nonetheless, there are some key restrictions. The 529 account will need to have been open for no less than 15 years, and solely contributions (and their earnings) made greater than 5 years in the past are eligible. As well as, rollovers rely towards the beneficiary’s annual Roth IRA contribution restrict, which is $7,000 in 2025, and the beneficiary will need to have earned revenue equal to or better than the rollover quantity in that yr.
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 yr. This implies it will take no less than 5 years to completely roll over the $35,000 most, assuming she earns sufficient yearly.
Even when you nonetheless have 529 plan cash left over after the Roth IRA rollover, you possibly can all the time 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 a substitute, I now see extra flexibility and utility than ever earlier than. Whether or not my children select to attend school, pursue commerce college, or observe a credentialed profession path, the funds might be there—and so they 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 discuss wishing I might spend the 529 stability on having fun with life extra as we speak. However figuring out my monetary habits since graduating in 1999, I’ll most likely simply find yourself investing the cash anyway.
Should you’re a guardian or grandparent, it’s a good time to revisit your 529 contribution technique and make the most of the brand new guidelines. Even when your property is projected to fall under the estate tax threshold, take into account contributing as much as the reward tax restrict anyway. Encourage your associate and the grandparents to do the identical.
With these adjustments, the 529 plan has turn into one of many most powerful generational wealth transfer vehicles accessible. Somewhat than merely gifting money, you’re passing down the chance for schooling, one thing that may be much more useful over a lifetime.
Reader 529 Plan Questions
Readers, are you as pumped as I’m that you may now use $20,000 a yr 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 at last, 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 essential, particularly if you wish to give your children optionality and monetary safety it doesn’t matter what path they select.
That’s why I’ve additionally invested in actual property by means of 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 beneath administration, Fundrise focuses on Sunbelt markets the place valuations are extra engaging and yields are typically larger—an interesting hedge in opposition to inflation and market volatility.
It’s also possible to put money into Fundrise Venture, which supplies publicity to personal AI firms like OpenAI, Anthropic, and Databricks. With AI poised to reshape the job market and your kids’s future profession prospects, I need to make certain 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 prepared to speculate $400,000+ in a 529 plan per child, I must also be prepared to speculate no less than $400,000 in non-public AI firms 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.
