American households saving money for their children’s educations can leverage tax-advantaged 529 accounts to make their dollars go further.
529 education savings accounts are typically opened by parents, guardians or grandparents for minor children and allow those savings to grow on a tax-deferred basis, and funds can be withdrawn tax-free when they’re used for qualified expenses. Individuals may also open 529 accounts to help save for their own education.
“529s are the optimal vehicle for education savings,” Thomas Psaltis, director of education savings programs at Bank of America Merrill Lynch, told FOX Business in an interview.
“That growth in earnings, if used tax-free, can have a really significant impact on providing more money for education in the future for children and grandchildren, but also help combat the rising tuition costs,” he said.
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Psaltis said that aside from that core feature, 529 accounts offer other features that may not be available to those who use other tax-advantaged savings accounts.
“One of the game changers is the versatility of 529 accounts,” which he noted were traditionally designed for handling expenses at four-year colleges but have “grown significantly to go beyond just that.”
“Some of the recent legislation under the SECURE 2.0 Act and even as President Trump’s One Big Beautiful Bill has now allowed for the use of K-12 tuition, which has since been expanded under the One Big Beautiful Bill from $10,000 annually to $20,000 to be used for K-12 in private education, even if you’re not using them directly for college,” Psaltis said.
“We’re now including registered apprenticeships and credentialing programs as part of qualified expenses that can be used tax-free as well,” he added.
Psaltis said that advisors at Merrill Lynch encourage clients to focus on planning ahead, and that 529 plans can meet the education savings needs of clients at all income levels.
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Since their inception 30 years ago, the number of 529 plans has grown to 17 million accounts across the industry and has a total of more than half a trillion dollars in assets, he noted. Despite 529 plans being available to Americans for three decades, Psaltis added there are still some common misperceptions about how the accounts work.
“There’s this misconception that you have to fully fund college for a 529 plan to be worthwhile, and sometimes that perception can create unnecessary pressure and cause families to delay in getting started,” he said.
“The biggest miss in that is the opportunity for that tax-free growth. Families who end up using taxable savings instead of a 529 may be giving up meaningful long-term returns that could be used tax-free,” Psaltis said.
Contributions are considered taxable gifts, so individuals can contribute up to $19,000 per year, per beneficiary without facing a gift tax liability. 529 accounts may also be frontloaded with up to five years of giving all at once.
“Let’s say there’s grandparents that would typically gift $38,000 annually for their kids’ 529. The 529 code allows them to gift up to five times that – or $190,000 per beneficiary – in a single year,” he said. “The contributions that were moved and the future growth of those contributions are generally no longer part of that grandparent’s estate, so long as they live for the next five years it won’t be subject to a clawback or a prorated pullback.”
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In cases where a 529 account beneficiary may not be planning on attending college or an accredited vocational tech program, there’s no required distribution, so the funds could be held in the account in case they change their mind and decide to do so at a later date.
“Holding onto it indefinitely, that child that doesn’t initially go off to college, well, maybe in a few years they decide they want to further their education either through college or an accredited trade,” Psaltis said. “You can switch beneficiaries at any time and for whatever reason, so if there’s unused funds, those monies could be shared with siblings.”
“If all else fails, and you have an account open for 18-plus years, there’s still other options,” he added. “One of the key features that has recently occurred over the past few years is the ability to roll over a portion of your 529 proceeds up to $35,000 into a Roth IRA on behalf of that beneficiary to sort of help jump-start their retirement, and that’s a really cool feature too.”
“At the end of the day, they’re not locked into those monies. If for whatever reason they have to take that money back, they can always take that money back themselves, but just note that this would be treated as a non-qualified withdrawal and that account owner would be subject to income tax and a potential 10% federal tax penalty, but only on the earnings portion of the account,” Psaltis said.
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