As quickly as each my kids had been born in 2017 and 2019, I superfunded their 529 plans equal to the five-year reward tax exemption. On the time, I used to be thrilled to do it given a mum or dad’s primary duty is to offer for his or her kids.
Lastly, a tax-efficient strategy to shift a few of my belongings to 2 of crucial dependents in my life. My mother and father 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 reward 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 price inflation. With that field checked, I all of the sudden felt adrift, like I had misplaced a key supply of goal. It was a mini parental existential disaster after fulfilling one of many largest monetary duties we have now.
Having kids gave me renewed vitality to earn and save put up early retirement, which was one thing I genuinely loved. It bolstered my ikigai, or purpose 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 get replaced by AI. This case 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 school. Will school 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 better flexibility. Alternatively, I might have invested extra in my most popular personal AI fund that holds the very names that would make discovering a job tough for my kids.
Anthropic, for instance, is reportedly elevating as much as $5 billion at a $170 billion valuation, up from a $63 billion valuation simply earlier this yr! Ah, I want I had invested much more cash in personal AI firms.
May Have Lived It Up Extra Right now
Selfishly, I might’ve purchased a Lambo and YOLOed extra in mid-life as a degenerate poker participant in Vegas. It has been one among my goals. We might’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 come back. As a substitute, I made a decision to economize and reside with my mother and father.
Alternatively, we might have used his 529 plan cash to develop our household’s passive revenue portfolio by a further $20,000 a yr 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 school in any respect.
In case you’re occupied with having kids, are you actually 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 school. Don’t let anybody inform you in any other case. Odds are, your youngster received’t get an athletic scholarship or be within the high 1% academically. That’s why the most effective factor you are able to do is save and make investments aggressively on their behalf.
Excessive Threat For Sending Our Youngsters To School 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 slightly 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 residing at house and doing the identical factor seems like an excessive amount of of a letdown. You don’t want a level to prepare dinner frozen meat patties.
Luckily, the One Massive Stunning Invoice Act (OBBBA) has made 529 plans extra invaluable going ahead. Right here’s what modified.
529 Plan Enhancements Beneath the OBBBA
I wrote concerning the OBBBA’s affect on FIRE seekers. Now let us take a look at a extra detailed look on the OBBBA’s affect for folks saving for his or her kids’s schooling. In case you’ve been worrying that you simply overfunded your kids’s 529 plans, this put up ought to allow you to really feel slightly higher.
1. Broader Checklist of Certified Schooling Bills
Part 70413 of the OBBBA expands what’s thought of a “certified schooling expense,” notably for Ok–12 college students. Right here’s what’s now lined beginning July 4, 2025:
Tuition for public, personal, or spiritual Ok–12 faculties
Curriculum and educational 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 many others.)
Twin-enrollment school course charges
Academic therapies for college kids with disabilities
Primarily based on this expanded record of certified schooling bills, it positive 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 a licensed tutor, these classes can now be paid for utilizing 529 funds. Similar factor for those who spend $1,000 on AI programs to assist increase your kid’s productiveness.
Simply word: 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. 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. Increased Annual Limits
The OBBBA will increase the Ok–12 eligible expense restrict from $10,000 to $20,000 per yr beginning in 2026. This helps households with youngsters in personal college 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 college.
For instance, personal grade college in Honolulu prices round $33,000 a yr from Ok 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 youngster from a 529 plan to cowl these prices gives significant reduction.
Take the traditional $500,000 family with two youngsters in personal college costing $100,000 a yr 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, and journey.
Utilizing $40,000 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 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 lined below the Workforce Innovation and Alternative Act (WIOA)
Instance: In case your youngster 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 get rid of 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 provide six-figure revenue potential, and demand is just 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/yr for 4 years. You may get the total credit score for those who 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 charge, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination provides you choices for those who’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 immediately 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 with the ability to roll over unused 529 plan cash is because of 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 supplies households with a invaluable strategy to repurpose leftover schooling funds and kickstart a baby’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 least 15 years, and solely contributions (and their earnings) made greater than 5 years in the past are eligible. As well as, rollovers rely 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 yr.
For instance, in case your daughter labored part-time and earned $6,000 in 2025, you could possibly roll over as much as $6,000 from her 529 into her Roth IRA that yr. This implies it might take at the least 5 years to totally roll over the $35,000 most, assuming she earns sufficient yearly.
Even for those who nonetheless have 529 plan cash left over after the Roth IRA rollover, you’ll be able to all the time designate the beneficiary to another person. Your grandchildren want an schooling too.
Reinvigorated Academic Planning
Because of 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 youngsters select to attend school, pursue commerce college, or observe a credentialed profession path, the funds might 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 speak about wishing I might spend the 529 steadiness on having fun with life extra at present. However understanding my monetary habits since graduating in 1999, I’ll in all probability 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 benefit from the brand new guidelines. Even when your property is projected to fall below the property tax threshold, take into account contributing as much as the reward tax restrict anyway. Encourage your associate and the grandparents to do the identical.
With these modifications, the 529 plan has grow to be one of the crucial highly effective generational wealth switch automobiles obtainable. Reasonably than merely gifting money, you’re passing down the chance for schooling, 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 yr 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 suppose these enhanced 529 advantages will simply make school much more costly in the long term? And eventually, 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 likely one of the greatest instruments to fund your youngster’s schooling tax-efficiently. However don’t cease there. Diversifying your loved ones’s portfolio past schooling financial savings is simply as necessary, 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 way of Fundrise, a platform that allows you to passively put money into a diversified portfolio of residential and industrial properties. With over $3 billion in belongings below administration, Fundrise focuses on Sunbelt markets the place valuations are extra engaging and yields are usually larger—an interesting hedge in opposition to inflation and market volatility.
You may as well put money into Fundrise Enterprise, which supplies 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 need to make sure that I’m investing not simply of their schooling, but additionally 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 keen to take a position $400,000+ in a 529 plan per child, I also needs to be keen to take a position at the 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.
