How to Build Generation Wealth using College 529 Plans


April 4, 2016


JER WW PHOTOA family, call them the Lucks, had a problem many would envy. Having long hoped to send their two children to the best possible colleges, the Lucks had funded a pair of 529 college-saving plans to the tune of $450,000. The problem? As the kids approached high school graduation, it looked like neither would need the money. With a 94-mph fastball, their son signed a professional baseball contract. And their daughter decided to attend a state university with her friends, where she secured a full-ride academic scholarship.

What, the Lucks asked, should they do about the 529 accounts?

First, a little background on 529 plans. Authorized by section 529 of the Internal Revenue Code, these “qualified tuition plans” are sponsored by states, state agencies and educational institutions. In other words, there are many 529 plans out there, not just one. Some allow you to pre-pay future tuition at today’s rates. But the ones the Lucks held were the general college saving variety, which allow the holder to save money towards the future higher education expenses of a named beneficiary. The tax advantage is that the earnings can be withdrawn tax-free to pay for qualified expenses such as tuition, room & board, books, etc.

The problem with taking money from a 529 plan and not spending it on the beneficiary’s education is that the earnings will be taxed normally along with a 10% penalty. There is an exemption from the penalty for cases where the student receives a scholarship, so the Lucks could take out the annual value of their daughter’s scholarship each year with no penalty (though the earnings would still be taxed normally).

The Lucks, however, were well set and didn’t need the money themselves, so the best move was to keep the 529 funds as they were. These plans are quite flexible. They can be used for graduate study as well as undergraduate. It’s also possible to roll money from one child’s plan into that of a sibling. That might come in handy if the son’s sports career didn’t work out, or if the daughter needed money to pay for grad school.

But say the son becomes a major league all-star and the daughter gets another full scholarship for graduate study. Why not then incorporate the 529 plans into estate planning? It’s easy enough to change a plan’s owner and beneficiary. And while some 529s have time limits, it’s possible to roll into one which doesn’t. Imagine the Luck’s $450,000 growing tax-free for another 20-30 years, at which time several grandchildren might be able to take advantage of it for their education.

Flexibility makes 529 plans an excellent tool for providing for the education of your children or that of generations yet to come. If you would like to discuss their nuances further, we at PARTNERSINWEALTH are here as your sounding board for all financial matters. We remove the guesswork from your decision-making to optimize your family’s net worth, speeding its growth over time. To learn more, please contact Jim Waters, CFP®, at 713.964.4028 or