Financial Advisor's Roadmap for Harnessing the Potential of a 529 Plan
High-net-worth families seeking education savings strategies that go beyond the traditional 529 plan often prioritize tax efficiency, flexibility, and long-term planning. While 529 plans remain the gold standard due to their tax advantages and wide range of qualified education expenses, complementary or alternative options can enhance a savings and estate plan.
Key strategies that extend beyond 529 plans include:
- Taxable Brokerage Accounts: These accounts offer flexibility, as funds can be used without restrictions. However, they do not provide tax-free growth, and withdrawals may incur capital gains tax.
- UGMA/UTMA Custodial Accounts: These accounts allow gifting beyond 529 limits and investments on behalf of the child. Funds become the child's asset when they reach majority age, providing flexibility but potentially impacting financial aid eligibility.
- Roth IRAs: Typically used for retirement, Roth IRAs can double as education savings. They offer tax-free growth, and withdrawals of contributions are tax- and penalty-free, while earnings withdrawals are penalty-free if used for qualified education expenses.
- Education Trusts: These trusts provide more control, oversight, and specific instructions for how and when education funds are used, making them ideal for families with complex legacy or special needs planning.
- Direct Tuition Payments: Grandparents or family members can pay tuition directly to an educational institution, avoiding gift tax limits and estate taxes while making a direct impact on education costs.
- Combining Tools: Many high-net-worth families find value in blending these options. For example, funding 50-75% of education costs through a 529 plan for tax efficiency and estate planning, with the balance in a taxable brokerage account or Roth IRA to retain flexibility for alternate education paths or expenses.
- Prepaid Tuition Plans within 529s: These plans let families lock in current tuition rates for in-state public schools, adding some cost certainty to long-term planning.
By adopting a multi-faceted approach using 529 plans as the core, along with taxable accounts, Roth IRAs, custodial accounts, trusts, and direct payments, high-net-worth families can address their diverse needs for tax efficiency, financial aid optimization, flexibility, and legacy goals in education savings. Consulting a financial advisor specializing in estate and education planning is often recommended to tailor these strategies effectively.
Other considerations include choosing low-cost, state-run plans over higher-cost adviser-sold options for 529 plans to maximize investment growth, researching state-specific benefits when choosing a 529 plan to enhance the value of your contributions, and reviewing your 529 plan annually to adjust contributions, update beneficiaries, and ensure your investment strategy is still aligned.
By taking advantage of front-loading provisions, donors can superfund each account with up to five years' worth of gifts at once. Funds from a 529 plan are typically treated more favorably in the financial aid process compared to taxable brokerage accounts.
- High-net-worth families might consider investing in education through Roth IRAs, as they offer both tax-free growth and flexibility for education expenses, making them a valuable complementary option for estate planning.
- In addition to researching low-cost 529 plans and reviewing them annually, exploring alternatives like taxable brokerage accounts, education trusts, and direct tuition payments can help personal-finance seekers achieve their goals in education savings and financial aid optimization.
