529 Plans
529 College Savings Plans
The most popular education savings vehicle, but one that must be managed carefully to preserve financial aid eligibility.
What Is a 529 Plan?
A 529 plan is a state-sponsored, tax-advantaged savings account designed specifically for education expenses. Contributions are made with after-tax dollars, grow tax-free, and withdrawals are tax-free when used for qualified education expenses. Over 30 states also offer a state income tax deduction for contributions.
Qualified Expenses
Tuition and fees (college, vocational)- Room and board (on-campus and off)
- Books, supplies, and equipment
- Computer and internet access required for school
- K-12 tuition (up to $10,000/year per SECURE Act)
- Student loan repayment (up to $10,000 lifetime)
- Registered apprenticeship programs
Key Features
- No federal contribution limit (gift tax rules apply)
- No income limits for contributors
- Beneficiary can be changed to another family member
- Available in all 50 states — can use any state's plan
- SECURE 2.0: Unused funds can roll to Roth IRA (limited)
- No age limit on when funds must be used
Superfunding: The 5-Year Election
529 plans qualify for "superfunding" — a special gift tax election allowing a contributor to make a lump-sum contribution of up to 5 years' worth of the annual gift tax exclusion in a single year. In 2025, this means up to $90,000 per beneficiary ($180,000 for married couples) can be contributed at once without gift tax consequences, by electing to spread it over 5 years on IRS Form 709.
529 Plans & Financial Aid: The Critical Warning
529 Assets CAN Reduce Your Financial Aid
When a 529 is owned by a parent, it is reported on the FAFSA as a parental asset, assessed at up to 5.64% of its value per year in the Student Aid Index (SAI) formula. This means a $100,000 529 balance could reduce annual need-based aid by up to $5,640.
The rules changed under the FAFSA Simplification Act (effective 2024–2025): grandparent-owned 529 distributions are no longer counted as student income on the FAFSA. Previously, grandparent distributions counted as student income at a 50% rate, devastating for aid. This change is significant.
Critical rule: All 529 funds, regardless of owner, should be spent down before receiving any needs-based aid. Using 529 funds during the aid-eligible years can paradoxically hurt you — spend 529 money first, before aid kicks in, then let aid cover remaining costs.
SECURE 2.0: Unused 529 Funds → Roth IRA
Starting in 2024, unused 529 funds can be rolled to a Roth IRA for the beneficiary, up to $35,000 lifetime, and no more than the Roth IRA annual contribution limit per year. The 529 must have been open for at least 15 years. This eliminates the old concern about "overfunding" a 529 if the student doesn't use it all.
Strategies to Maximize Both Savings & Aid
This Requires Professional Planning: Contact Us Early
There are legal strategies to structure college savings in ways that minimize their impact on the FAFSA formula. These include timing of contributions, choice of account owner, asset repositioning, and more. However, these strategies must be implemented years before the student begins college applications, ideally when the student enters high school.
Families who meet with us in 9th or 10th grade consistently receive better financial aid packages than those who call in 12th grade. The time to act is now.
Protect Your Aid Eligibility: Plan Now
Don't let a well-intentioned college savings plan accidentally disqualify your student from financial aid. Schedule a consultation to build a strategy that protects both your savings and your eligibility.
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