As quickly as each my kids had 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 duty is to supply for his or her kids.
Lastly, a tax-efficient option to shift a few of my property to 2 vital dependents. My mother and father and my spouse chipped in every year as effectively. As soon as the five-year contribution window reset, I saved 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 personal 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 goal. It was a mini parental existential disaster after fulfilling one of many greatest monetary tasks we have now.
Having kids gave me renewed vitality 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 learning and paying 16 years’ price of tuition, solely to be changed by AI. This example 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 may have directed extra of that capital into UGMA custodial accounts for better flexibility. Alternatively, I may have invested extra in my most popular personal AI/progress fund that holds the very names that would make discovering a job troublesome for my kids.
Anthropic, a high 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 personal AI firms.
May Have Lived It Up Extra At this time
Selfishly, I may’ve purchased a Lambo and YOLOed extra in mid-life as a degenerate poker participant in Vegas. It has been one in every of my desires. We may’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer time—and achieved the identical for a lot of summers to return. As an alternative, I made a decision to economize and create priceless recollections residing with my mother and father in my childhood dwelling.
Alternatively, we may have used his 529 plan cash to develop our household’s passive revenue portfolio by an extra $20,000 a 12 months to purchase extra time freedom in the present day. With much less cash locked right into a 529, we’d additionally really feel much less stress for our son to attend school in any respect.
For those who’re enthusiastic about having kids, are you really ready to sacrifice your time, cash, and freedom for them? Elevating youngsters isn’t low cost—particularly if you wish to assist them go to varsity. Don’t let anybody let you know in any other case. Odds are, your little one received’t get an athletic scholarship or be within the high 1% academically. That’s why the very best factor you are able to do is save and make investments aggressively on their behalf.
Excessive Danger For Sending Our Children To Faculty In The Future
The considered forking over ~$400,000 in in the present day’s {dollars} for faculty, just for them to finish up in a minimal wage job, makes me just a little sick.
I nonetheless bear 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 school simply to finish up residing at dwelling and doing the identical factor seems like an excessive amount of of a letdown. You don’t want a level to cook dinner frozen meat patties.
Happily, the One Large Stunning Invoice Act (OBBBA) has made 529 plans extra helpful going ahead. Right here’s what modified.
529 Plan Enhancements Beneath the OBBBA
I wrote concerning the OBBBA’s influence on FIRE seekers. Now let’s take a look at a extra detailed look on the OBBBA’s influence for folks saving for his or her kids’s training. For those who’ve been worrying that you simply overfunded your kids’s 529 plans, this submit ought to assist you really feel just a little higher.
1. Broader Checklist of Certified Training Bills
Part 70413 of the OBBBA expands what’s thought of a “certified training expense,” significantly for Okay–12 college students. Right here’s what’s now coated beginning July 4, 2025:
- Tuition for public, personal, or non secular Okay–12 colleges
- 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 students with disabilities
Based mostly on this expanded checklist of certified training bills, it certain looks like 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 in the event you spend $1,000 on AI programs to assist increase your kid’s productiveness.
Simply be aware: 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. For those who 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. Larger 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 youngsters in personal college or specialised packages 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 huge cities paying for personal grade college.
For instance, personal grade college in Honolulu prices round $33,000 a 12 months from Okay by 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 little one from a 529 plan to cowl these prices presents significant reduction.
Take the basic $500,000 family with two youngsters in personal college costing $100,000 a 12 months whole. That’s roughly $150,000 in gross revenue going simply to tuition. After taxes, there internet revenue after paying tuition would possibly solely be about $100,000 – $150,000 to pay for hire 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 mother and father first have to avoid wasting aggressively.
3. Postsecondary Credentials Now Lined
One of many greatest psychological blocks for funding a 529 plan was: “What if my child doesn’t go to varsity?” Part 70414 addresses that by permitting 529 funds for use for:
- Trade-recognized credentials (e.g., Licensed Monetary Planner, CISSP, AWS certifications)
- Registered apprenticeships (e.g., electricians, plumbers)
- State-licensed skilled packages (e.g., cosmetology, HVAC certification, masseuse)
- Any credential coated beneath the Workforce Innovation and Alternative Act (WIOA)
Instance: In case your little one desires to grow 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 gear — utilizing 529 funds tax-free.
With synthetic intelligence poised to eradicate hundreds of 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 supply six-figure revenue potential, and demand is simply rising. After spending over $40,000 reworking 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 $2,500/12 months for 4 years. You will get the complete credit score in the event 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 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 professional 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 provides you choices in the event you’ve overfunded a 529 for certified instructional bills or wish to optimize your return. To make clear, the AOTC is a tax credit score — it straight 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 Potential To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though having the ability to roll over unused 529 plan cash is due to 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 gives households with a helpful option 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 will need to have been open for at the very 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 will need to have earned revenue equal to or better 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 could take at the very least 5 years to totally roll over the $35,000 most, assuming she earns sufficient yearly.
Even in the event 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 training too.
Reinvigorated Academic Planning
Because of the OBBBA’s updates to 529 plans, I am much less involved about overfunding two 529 plans. As an alternative, I now see extra flexibility and utility than ever earlier than. Whether or not my youngsters select to attend school, pursue commerce college, 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 may spend the 529 steadiness on having fun with life extra in the present day. However realizing my monetary habits since graduating in 1999, I’d most likely simply find yourself investing the cash anyway.
For those who’re a dad or mum or grandparent, it’s a good time to revisit your 529 contribution technique and benefit from the brand new guidelines. Even when your property is projected to fall beneath the property tax threshold, think about contributing as much as the present tax restrict anyway. Encourage your companion and the grandparents to do the identical.
With these modifications, the 529 plan has grow to be one of many strongest generational wealth switch automobiles out there. Reasonably than merely gifting money, you’re passing down the chance for training, one thing that may be way more helpful over a lifetime.
Reader 529 Plan Questions
Readers, are you as pumped as I’m that you would be able to now use $20,000 a 12 months 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 assume these enhanced 529 advantages will simply make school much more costly in the long term? And eventually, how a lot do you assume is an excessive amount of to have saved in a 529 plan?
Diversify Past The 529 Plan
A 529 plan is among the greatest instruments to fund your little one’s training tax-efficiently. However don’t cease there. Diversifying your loved ones’s portfolio past training financial savings is simply as vital, particularly if you wish to give your youngsters optionality and monetary safety it doesn’t matter what path they select.
That’s why I’ve additionally invested in actual property by 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 beneath administration, Fundrise focuses on Sunbelt markets the place valuations are extra engaging and yields are usually larger—an interesting hedge towards inflation and market volatility.
You can even spend money on Fundrise Enterprise, which gives 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 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 take a position $400,000+ in a 529 plan per child, I must also be prepared to take a position at the very least $400,000 in personal 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.
