As quickly as each my kids 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 father or mother’s primary accountability is to offer for his or her kids.
Lastly, a tax-efficient option to shift a few of my property to 2 necessary dependents. My dad and mom and my spouse chipped in every year as properly. 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 objective of funding 4 years of full-priced personal college tuition in a 529 plan—sufficient to ideally match or outpace school value 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’ve got.
Having kids gave me renewed power to earn and save put up early retirement, which was one thing I genuinely loved. It strengthened my ikigai, or motive 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 finding out and paying 16 years’ value of tuition, solely to get replaced by AI. This case is going on proper now to hundreds 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 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 higher flexibility. Alternatively, I may have invested extra in my most well-liked personal AI/progress fund that holds the very names that would make discovering a job tough for my kids.
Anthropic, a prime holding, 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.
Might 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 among my desires. We may’ve simply spent $50,000 on a candy trip rental in Honolulu for 5 weeks this summer season—and achieved the identical for a lot of summers to come back. As an alternative, I made a decision to save cash and create priceless recollections dwelling with my dad and mom in my childhood house.
Alternatively, we may have used his 529 plan cash to develop our household’s passive earnings portfolio by an extra $20,000 a yr to purchase extra time freedom in the present day. 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 interested by having kids, 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 gained’t get an athletic scholarship or be within the prime 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 Children To School In The Future
The considered forking over ~$400,000 in in the present day’s {dollars} for faculty, 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 house 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.
Thankfully, the One Huge Stunning Invoice Act (OBBBA) has made 529 plans extra priceless going ahead. Right here’s what modified.
529 Plan Enhancements Below the OBBBA
I wrote in regards to the OBBBA’s impression on FIRE seekers. Now let’s take a look at a extra detailed look on the OBBBA’s impression for fogeys saving for his or her kids’s schooling. In case you’ve been worrying that you just overfunded your kids’s 529 plans, this put up ought to show you how to really feel a bit higher.
1. Broader Checklist of Certified Training Bills
Part 70413 of the OBBBA expands what’s thought of a “certified schooling expense,” significantly for Okay–12 college students. Right here’s what’s now coated beginning July 4, 2025:
Tuition for public, personal, or spiritual Okay–12 colleges
Curriculum and educational supplies, together with on-line programs
Books and tutorial provides
Tutoring providers (if licensed and unrelated to the scholar)
Standardized take a look at charges (SAT, ACT, AP exams, and so on.)
Twin-enrollment school course charges
Academic therapies for college students with disabilities
Primarily based on this expanded listing of certified schooling bills, it certain looks like nearly 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 periods can now be paid for utilizing 529 funds. Similar factor should you spend $1,000 on AI programs to assist enhance your kid’s productiveness.
Simply be aware: 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. Larger Annual Limits
The OBBBA will increase the Okay–12 eligible expense restrict from $10,000 to $20,000 per yr beginning in 2026. This helps households with children in personal faculty or specialised applications pay extra out of their 529 tax-free. Whereas this gained’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, personal grade faculty in Honolulu prices round $33,000 a yr from Okay via grade 12. In San Francisco and New York Metropolis, tuition ranges from $45,000 to $65,000 yearly. Having the ability to withdraw as much as $20,000 per little one from a 529 plan to cowl these prices gives significant aid.
Take the basic $500,000 family with two children in personal faculty costing $100,000 a yr complete. That’s roughly $150,000 in gross earnings going simply to tuition. After taxes, there web earnings after paying tuition may solely be about $100,000 – $150,000 to pay for hire or a mortgage, meals, transportation, garments, retirement, and journey.
Utilizing $40,000 a yr 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 applications (e.g., cosmetology, HVAC certification, masseuse)
Any credential coated beneath 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 remove tens of millions of white-collar workplace jobs within the coming years, it’s sensible to contemplate careers in additional AI-resistant industries.
Trades like plumbing and electrical work already provide six-figure earnings potential, and demand is just rising. After spending over $40,000 transforming an in-law unit in Honolulu, I’ve little question 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) — value as much as $2,500/yr for 4 years. You will get the complete credit score should 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 manner 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 earnings.
At a 22% tax price, you pay $440 in taxes — however nonetheless get a $2,500 tax credit score.
This coordination provides you choices should you’ve overfunded a 529 for certified instructional bills or wish 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. Due to this fact, the AOTC tax credit score will prevent extra.
5. The Capacity To Roll Over Unused 529 Plan Cash Into A Roth IRA
Though having the ability to roll over unused 529 plan cash is due to the SECURE 2.0 Act, not the OBBBA, it is nonetheless value 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 priceless option 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 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 earnings equal to or higher 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 could take a minimum of 5 years to totally roll over the $35,000 most, assuming she earns sufficient yearly.
Even should 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 schooling too.
Reinvigorated Academic 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 kids.
Sure, I speak about wishing I may spend the 529 steadiness on having fun with life extra in the present day. However realizing my monetary habits since graduating in 1999, I’d most likely simply find yourself investing the cash anyway.
In case you’re a father or mother 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 beneath the property tax threshold, take into account contributing as much as the present tax restrict anyway. Encourage your accomplice and the grandparents to do the identical.
With these adjustments, the 529 plan has turn into one of the highly effective generational wealth switch autos obtainable. Relatively than merely gifting money, you’re passing down the chance for schooling, one thing that may be much more priceless over a lifetime.
Reader 529 Plan Questions
Readers, are you as pumped as I’m you can now use $20,000 a yr 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 suppose these enhanced 529 advantages will simply make school much more costly in the long term? And at last, 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 without doubt one of the greatest instruments to fund your little one’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 children optionality and monetary safety it doesn’t matter what path they select.
That’s why I’ve additionally invested in actual property via Fundrise, a platform that allows you to passively put money into a diversified portfolio of residential and industrial properties. With over $3 billion in property beneath administration, Fundrise focuses on Sunbelt markets the place valuations are extra engaging and yields are typically larger—an interesting hedge in opposition to inflation and market volatility.
You can too put money into Fundrise Enterprise, which offers publicity to non-public AI firms like OpenAI, Anthropic, and Databricks. With AI poised to reshape the job market and your kids’s future profession prospects, I wish to make certain 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 a minimum of $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.
