Sachetta, LLC
Every year, May 29th—or 5/29—offers a timely nudge to revisit one of the most talked-about education savings tools: the 529 plan. At Sachetta, we’ve covered these plans from many angles. And while they might not be the perfect fit for every family, understanding how they work is a valuable step in building a thoughtful education strategy.
This article brings together highlights from past pieces, offering a clear and approachable overview. Our goal isn’t to convince you to open an account today—it’s to help you feel informed and ready to talk through your options with your advisor. As always, we believe financial decisions are best made in conversation, not isolation.
529 Plans at a Glance
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. They’re named after Section 529 of the Internal Revenue Code and come in two main varieties:
- 529 College Savings Plans, which allow funds to grow tax-deferred and be withdrawn tax-free for qualified education expenses.
- 529 Prepaid Tuition Plans, which allow you to lock in today’s tuition rates at participating colleges and universities.
College Savings Plans are by far the more popular choice due to their flexibility. Funds in these plans can typically be used at any accredited post-secondary institution in the U.S. and, in some cases, abroad. Qualified expenses include tuition, fees, books, supplies, and even room and board for students enrolled at least half-time.
What’s New and Evolving with 529s
In recent years, 529 plans have become more versatile:
- Roth IRA Rollovers: Starting in 2024, some unused 529 plan funds can be rolled into a Roth IRA for the beneficiary—a major enhancement for families worried about "overfunding."
- Expanded Qualified Expenses: In addition to college costs, funds can now be used for K-12 tuition (up to $10,000 per year), student loan repayment (up to $10,000 per beneficiary), and registered apprenticeship programs.
These updates have made 529 plans more attractive, especially for families who want to support a broader vision of education.
Common Questions Families Ask
"What if my child doesn’t go to college?"
You won’t lose the money, but non-qualified withdrawals are subject to income tax and a 10% penalty on the earnings portion. That said, you can change the beneficiary to another eligible family member or now, potentially roll funds into a Roth IRA.
"What if we save too much?"
That’s rare, but again, beneficiary changes or rollover options offer flexibility. It's also worth considering how 529 funds could support graduate school or continuing education down the road.
"How do 529s impact financial aid?"
Generally, 529 plans owned by a parent or dependent student are treated favorably in financial aid calculations. However, grandparent-owned 529s require strategic planning, as distributions could count as student income.
Alternatives and Complements to 529 Plans
529s aren’t the only way to save for education:
- Custodial Accounts (UTMA/UGMA): These accounts don’t offer the same tax advantages, and the funds become the child’s property at the age of majority. However, they offer broader use of funds beyond education.
- Coverdell ESAs: These accounts also grow tax-free, but have lower contribution limits and income restrictions.
Sometimes, families use a mix of these tools. A 529 might cover tuition and housing, while a custodial account helps with transportation, study abroad, or other non-qualified costs. Again, your advisor can help you weigh the trade-offs.
529 Planning by Age or Stage
Your approach to 529 planning might differ depending on where you are:
- New Parents: Starting early allows the magic of compounding to work in your favor. Even small monthly contributions can add up.
- Middle School Families: It’s not too late. At this stage, you might increase contributions or use a lump sum gift from a grandparent.
- High Schoolers: 529s can still play a role, especially if your student is considering graduate school or if you're planning for more than one child.
- Grandparents: Contributing to a 529 can be a way to leave a legacy while potentially reducing your taxable estate.
Mistakes to Avoid
- Waiting too long to start: The earlier you begin saving, the better.
- Overfunding without considering other goals: Avoid putting more into a 529 than you’re confident will be used for education.
- Not coordinating with financial aid: Timing of distributions and ownership structure matter.
How Sachetta Helps
Our team helps families understand where 529s fit within their broader financial plan. We look at your current cash flow, tax situation, and education goals to help you decide how much to save, when to save it, and where to allocate those dollars. We also help coordinate these decisions across family members, like when grandparents want to get involved.
Let’s Talk About It
If you have a 529 plan, are thinking about starting one, or want to know how it fits into your plan, let’s talk. Education planning is more than just picking an account, it’s about building a strategy that supports your values and your family’s future. We're here to help you make those decisions with clarity and confidence.
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