As quickly as each my youngsters 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 mum or dad’s primary accountability is to offer for his or her youngsters.
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 every year as nicely. 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 purpose 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 out of the blue felt adrift, like I had misplaced a key supply of objective. It was a mini parental existential disaster after fulfilling one of many largest monetary obligations we now have.
Having youngsters gave me renewed vitality to earn and save put up early retirement, which was one thing I genuinely loved. It strengthened 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 concern: think about finding out and paying 16 years’ price of tuition, solely to be changed by AI. This case is going on proper now to hundreds of faculty graduates, and I do not need my youngsters 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 increased 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 larger flexibility. Alternatively, I may have invested extra in my most well-liked non-public AI/progress fund that holds the very names that would make discovering a job troublesome for my youngsters.
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 non-public AI firms.
May Have Lived It Up Extra As we speak
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 all my goals. We may’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer season—and accomplished the identical for a lot of summers to come back. As an alternative, I made a decision to economize and create priceless recollections dwelling with my dad and mom in my childhood residence.
Alternatively, we may have used his 529 plan cash to develop our household’s passive revenue portfolio by a further $20,000 a 12 months to purchase extra time freedom immediately. 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.
In case you’re desirous about having youngsters, are you really 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 little one received’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 Danger For Sending Our Youngsters To School In The Future
The considered forking over ~$400,000 in immediately’s {dollars} for school, just for them to finish up in a minimal wage job, makes me a 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 pupil. To lay our a fortune on school simply to finish up dwelling at residence and doing the identical factor appears like an excessive amount of of a letdown. You don’t want a level to cook dinner frozen meat patties.
Fortuitously, the One Massive 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 influence on FIRE seekers. Now let us take a look at a extra detailed look on the OBBBA’s influence for folks saving for his or her youngsters’s training. In case you’ve been worrying that you just overfunded your youngsters’s 529 plans, this put up ought to assist you to really feel a bit higher.
1. Broader Record 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 colleges
- Curriculum and tutorial supplies, together with on-line programs
- Books and tutorial provides
- Tutoring providers (if licensed and unrelated to the coed)
- Standardized check charges (SAT, ACT, AP exams, and so forth.)
- Twin-enrollment school course charges
- Instructional therapies for college students with disabilities
Based mostly on this expanded listing of certified training bills, it positive looks as if nearly something goes. And I am undecided how the federal government can penalize you if it is a grey space.
Instance:Â In case your eighth grader is struggling in math and also you pay $150 per session for a licensed 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 enhance your kid’s productiveness.
Simply observe: 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. In case you withdrew $500 for an AP prep course that included $200 of account earnings, you may 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 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 large cities paying for personal grade faculty.
For instance, non-public grade faculty in Honolulu prices round $33,000 a 12 months from Okay by means 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 little one from a 529 plan to cowl these prices gives significant reduction.
Take the traditional $500,000 family with two children in non-public faculty 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 may 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 save lots of 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:
- 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 underneath the Workforce Innovation and Alternative Act (WIOA)
Instance: In case your little one needs 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 gear — utilizing 529 funds tax-free.
With synthetic intelligence poised to get rid of tens of millions of white-collar workplace jobs within the coming years, it’s clever to think about 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 transforming 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 may get the complete credit score in the event you spend $4,000 out-of-pocket on tuition and charges. 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 charge, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination offers you choices in the event 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 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 Capability To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though with 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 offers households with a invaluable strategy to repurpose leftover training funds and kickstart a toddler’s retirement financial savings, tax- and penalty-free.
Nevertheless, there are some key restrictions. The 529 account will need to have been open for a minimum of 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 larger than the rollover quantity in that 12 months.
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 12 months. This implies it will take a minimum of 5 years to completely 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 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 an alternative, I now see extra flexibility and utility than ever earlier than. Whether or not my children select to attend school, pursue commerce faculty, or observe a credentialed profession path, the funds can 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 youngsters.
Sure, I speak about wishing I may spend the 529 stability on having fun with life extra immediately. However understanding my monetary habits since graduating in 1999, I’d most likely simply find yourself investing the cash anyway.
In case you’re a mum or dad 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 underneath the property 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 into one of many strongest generational wealth switch autos obtainable. Relatively than merely gifting money, you’re passing down the chance for training, one thing that may be way 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 assume these enhanced 529 advantages will simply make school much more costly in the long term? And at last, 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 without doubt one of 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 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 means of Fundrise, a platform that permits 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 usually increased—an interesting hedge towards inflation and market volatility.
You may also spend money on Fundrise Enterprise, which offers publicity to personal AI firms like OpenAI, Anthropic, and Databricks. With AI poised to reshape the job market and your youngsters’s future profession prospects, I need to be sure 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 also needs to be prepared to take a position a minimum of $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.
