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 dad or mum’s primary accountability is to supply for his or her kids.
Lastly, a tax-efficient strategy to shift a few of my property to 2 necessary dependents. My dad and mom and my spouse chipped in annually as properly. As soon as the five-year contribution window reset, I stored 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 faculty price inflation. With that field checked, I all of a sudden felt adrift, like I had misplaced a key supply of function. It was a mini parental existential crisis after fulfilling one of many largest monetary tasks we’ve.
Having kids gave me renewed power to earn and save publish early retirement, which was one thing I genuinely loved. It bolstered my ikigai, or motive 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 replaced by AI. This example is occurring proper now to 1000’s 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 faculty. Will faculty actually price 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 higher flexibility. Alternatively, I might have invested extra in my preferred private AI/growth fund that holds the very names that would make discovering a job tough for my kids.
Anthropic, a prime holding, 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 might’ve purchased a Lambo and YOLOed extra in mid-life as a degenerate poker participant in Vegas. It has been certainly one of my goals. We might’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer time—and accomplished the identical for a lot of summers to return. As a substitute, I made a decision to economize and create priceless recollections dwelling with my dad and mom in my childhood home.
Alternatively, we might have used his 529 plan cash to develop our household’s passive income portfolio by an extra $20,000 a 12 months to purchase extra time freedom at present. With much less cash locked right into a 529, we’d additionally really feel much less strain for our son to attend faculty in any respect.
Should you’re enthusiastic 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 inform you in any other case. Odds are, your baby received’t get an athletic scholarship or be within the prime 1% academically. That’s why the very best factor you are able to do is save and make investments aggressively on their behalf.
Excessive Threat For Sending Our Children To Faculty In The Future
The considered forking over ~$400,000 in at present’s {dollars} for school, just for them to finish up in a minimal wage job, makes me just a little 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 pupil. To lay our a fortune on faculty 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 prepare dinner frozen meat patties.
Luckily, the One Huge Stunning Invoice Act (OBBBA) has made 529 plans extra invaluable going ahead. Right here’s what modified.
529 Plan Enhancements Below 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 impression for folks saving for his or her kids’s training. Should you’ve been worrying that you just overfunded your kids’s 529 plans, this publish ought to enable you really feel just a little higher.
1. Broader Listing of Certified Schooling Bills
Part 70413 of the OBBBA expands what’s thought-about a “certified training expense,” notably 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 faculties
- Curriculum and tutorial supplies, together with on-line programs
- Books and tutorial provides
- Tutoring providers (if licensed and unrelated to the scholar)
- Standardized check charges (SAT, ACT, AP exams, and many others.)
- Twin-enrollment faculty course charges
- Instructional therapies for college students with disabilities
Based mostly on this expanded record of certified training bills, it certain looks as if virtually 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. Similar factor when you spend $1,000 on AI programs to assist enhance your kid’s productiveness.
Simply word: 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. 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 Okay–12 eligible expense restrict from $10,000 to $20,000 per 12 months beginning in 2026. This helps households with children in non-public faculty 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 massive cities paying for personal grade faculty.
For instance, non-public grade faculty in Honolulu prices round $33,000 a 12 months from Okay by way of grade 12. In San Francisco and New York Metropolis, tuition ranges from $45,000 to $65,000 yearly. With the ability to withdraw as much as $20,000 per baby from a 529 plan to cowl these prices provides significant reduction.
Take the classic $500,000 household with two children in non-public faculty costing $100,000 a 12 months whole. 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, retirement, and journey.
Utilizing $40,000 a 12 months in mixed 529 plan funds helps stem the monetary bleeding and provides much-needed flexibility. However to take action, the dad and mom first have to avoid wasting aggressively.
3. Postsecondary Credentials Now Coated
One of many largest 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 coated underneath the Workforce Innovation and Alternative Act (WIOA)
Instance: In case your baby desires to turn out to be 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 thousands and 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 provide six-figure earnings potential, and demand is barely 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) — value as much as $2,500/12 months for 4 years. You will get the total 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 method to do 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 earnings.
At a 22% tax charge, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination provides you choices when 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 Means To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though with the ability to roll over unused 529 plan cash is because of 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 invaluable strategy to repurpose leftover training funds and kickstart a toddler’s retirement financial savings, tax- and penalty-free.
Nonetheless, there are some key restrictions. The 529 account should have been open for at the 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 higher than the rollover quantity in that 12 months.
For instance, in case your daughter labored part-time and earned $6,000 in 2025, you can roll over as much as $6,000 from her 529 into her Roth IRA that 12 months. This implies it will take at the least 5 years to totally 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 may at all times designate the beneficiary to another person. Your grandchildren want an training too.
Reinvigorated Instructional Planning
Due to 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 faculty, pursue commerce faculty, or comply with 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 discuss wishing I might spend the 529 steadiness on having fun with life extra at present. However realizing my monetary habits since graduating in 1999, I’d most likely simply find yourself investing the cash anyway.
Should you’re a dad or mum 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 under the estate tax threshold, think about contributing as much as the present tax restrict anyway. Encourage your accomplice and the grandparents to do the identical.
With these modifications, the 529 plan has turn out to be one of many most powerful generational wealth transfer vehicles obtainable. Quite than merely gifting money, you’re passing down the chance for training, one thing that may be much more invaluable over a lifetime.
Reader 529 Plan Questions
Readers, are you as pumped as I’m you could now use $20,000 a 12 months from a 529 plan for personal grade faculty 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 faculty 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 baby’s training tax-efficiently. However don’t cease there. Diversifying your loved ones’s portfolio past training financial savings is simply as necessary, 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 way of Fundrise, a platform that allows you to passively spend money on a diversified portfolio of residential and industrial properties. With over $3 billion in property underneath administration, Fundrise focuses on Sunbelt markets the place valuations are extra enticing and yields are typically larger—an interesting hedge in opposition to inflation and market volatility.
It’s also possible to spend money on Fundrise Venture, 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 be certain I’m investing not simply of their training, but in addition 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 at the 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.
