529 Plans: A Valuable College Savings Tool but Not a Magic Bullet

By Collin Gimlin and Christian Conner, CFP®

When it comes to planning for your child’s education, one tool that likely comes to mind is the 529 college savings plan. As helpful as these can be, it’s important to understand that they do not provide a one-size-fits-all solution. Instead, 529 plans should be considered as one of many options to secure your child’s future amid an overall plan to ensure your own financial well-being.

Recent changes to 529 plans have broadened their appeal, allowing parents to use these funds not only for college expenses, but also for primary and secondary education costs. As a result, anything from a private-school uniform for your 10-year-old to a laptop for your teenager can now potentially be covered through a 529 plan.

In addition, the individual contribution limit has increased to $17,000 for 2023. This means that two parents contributing jointly to a 529 plan can add up to $34,000 per year.


Avoiding Over-Reliance

Many parents tend to have a basic understanding that a 529 plan is for college savings, but lack comprehensive knowledge of how it works, or the associated benefits and drawbacks.

One common misconception is to view 529 plans as a magic bullet for college savings. Parents often see the words “tax deduction” and think they should funnel any funds earmarked for college savings into this account. The truth is that while these plans can be beneficial, they aren’t a quick fix to all college-funding issues.

We recommend learning the overall implications of a 529 plan, including limited investment exposure compared to individual brokerage accounts, for example — as well as the balance between the tax benefits and potential taxable events.

One of the issues that can arise with 529 plans is contributing a lot of money to them, only for a child to wind up earning a significant scholarship or deciding not to attend college at all. This scenario can leave parents potentially facing penalties when making withdrawals that aren’t education-related.

To help mitigate the issue, the recently passed SECURE 2.0 Act allows a rollover of $6,500 per year from a 529 to a Roth IRA without penalties, up to a lifetime aggregate limit of $35,000. This measure provides an alternative use for 529 funds and a chance for beneficiaries to begin saving in a Roth IRA, further diversifying their financial future.


Prioritizing Retirement Over Tuition

Above all, before considering 529 plans or any other college savings vehicle, parents should ensure they are adequately saving for their retirement. There are numerous ways to fund a college education — such as scholarships, grants and financial aid — but only one way to fund your retirement.

It might seem counterintuitive to prioritize your retirement savings over a child’s college fund. But remember, ensuring your financial security means that you’re ultimately doing your children a favor by not becoming a burden to them in your later years. Once your retirement plan is on track, then 529 plans can certainly be an effective tool to meet some educational expenses.

Also remember that the rapid development of the “gig economy” in recent years, combined with skyrocketing college tuition, has raised legitimate questions about the relative value of a college degree — and whether or not it would even be the best path for your child to pursue.

529 plans should best be viewed as a potentially helpful component of a larger financial strategy, but not as the ultimate college savings solution. We suggest sitting down with a financial advisor, who can assess your personal circumstances, provide a comprehensive understanding of your options, and help guide you in making the best decisions for your future as well as your children’s education.



S. Securities and Exchange Commission: https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans
Investopedia: https://www.investopedia.com/personal-finance/how-new-tax-changes-promote-529-investments/
Forbes: https://www.forbes.com/sites/robertfarrington/2022/12/22/529-plan-contribution-limits-rise-in-2023/?sh=4e7d16f0538f
United States Senate Committee on Finance: https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
TheStreet: https://www.thestreet.com/retirement-daily/your-money/rolling-over-unused-529-funds-to-a-roth-ira

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