Are 529 plans worth it

Is there another way to save and prepare for your children’s college fund? And will paying for my kids’ education affect my retirement?

There are many ways to go about saving or planning ahead for your children’s college. 

What are your priorities? Some of your priorities will be competing priorities as you begin saving for college and one of those priorities could be your retirement. It is best to talk over these decisions with a financial planner, or with your financial advisor. This way you can determine what the best course of action, or strategy will be so that you are able to consistently align your priorities. There are a lot of questions and factors to consider.

How to save for your kid’s college depends upon:

  1.     What percentage of your kid’s college do you want to pay? 100%, 50%, 0%
  2.     How much money do you have available to give towards your child’s college fund? (Look at your expenses and current savings and determine what is feasible and aligns with your priorities.)
  3.     What are your priorities? Determine what matters most and rank these priorities in order.
  4.     How much time do you have before your kids start school? Determine your timeframe(s) to see how much you reasonably can save for college each month.
  5.     How much is the cost of attendance at the school of your child’s choice. ? Ask if this school is realistic based on your child’s grades, aptitude, SAT scores, interests and possible career after college. It is important to be realistic when determining what school would be best for your child. Will this school be the best value? Will they make enough money upon graduation to justify the costs? Is college even the best option for my child? I know it has been ingrained in most of you to want your child to attend school, but sometimes this is not the best option based on their field of interest. *tip – have your child intern or find a mentor that is doing the job they want to do upon graduation before they attend college. This will help your student to see if that career choice is still optimal.
  6.     Will savings for my child’s potential college costs take away from my retirement plan? Remember that there are no scholarships, grants or student loans for your retirement.

Some ways you can help pay for college:

  1.     Student loans – this is hard to consider as I am sure as a parent you want to provide your child with the best education at the University of his/her choice. In an ideal world you might pay for the entire thing because you want the best for them, but student loans can be a helpful tool to cover some or all of the costs. However, you probably do not want your child paying off their student loans for the next 10 years either.
  2.     Financial aid – apply for financial aid if you qualify. If you can receive financial aid there is no shame in applying and using the resources available to your child.
  3.     Scholarships and grants – There are so many scholarships out there. Do your homework and have your child look for scholarships that they can apply for. Set a goal and have them fill out one scholarship or grant a week.
  4.     Have your child work a part-time job and put this money towards his/her college fund.
  5.     Make a monthly contribution to a separate savings account designated just for your child’s college fund. Make sure that it is an amount you can afford.
  6.     529 plan – this plan offers tax advantages; potential tax free growth and state income tax deduction for contributions to the plan.. There are many plans to choose from (you can even choose plans in a different state than your own). We recommend that you speak with a trusted Advisor to help you maximise your tax savings.
  7.     Open an investment account – separate from your retirement account.

You should definitely consider the positives and negatives of all options, except for applying for scholarships and grants, or financial aid if you qualify. These options are a no brainer. But when it comes to these decisions you need to understand the differences and how they can affect you in the long run. If you have your child use student loans you will just need to be aware of the terms and length of time to pay them off and how that will affect your child. If you have determined that you do want to pay a portion of your child’s education, then you have to decide which route is best.

A savings account is better than nothing, but it does not allow you to grow your money faster than the rate of inflation  or receive potential tax benefits.


Changes to the rules for 529 plans have been made in the U.S. as of May 1, 2023. These changes offer more flexibility for how the funds in these plans can be used. Starting in 2024, individuals who own a 529 plan will have the option to use any extra funds in the plan to support the retirement savings of the plan’s beneficiaries.

Here’s a breakdown of what you need to understand about this update:

How does this new law impact excess 529 plan funds? In December 2022, a new law called SECURE Act 2.0 was introduced to help Americans enhance their retirement savings. One of the changes allows the owners of 529 plans to move funds that haven’t been used in the plan directly into the beneficiary’s Roth IRA.

This option becomes effective in 2024. By utilizing this option, beneficiaries could potentially have retirement funds that are not subject to taxes. Up until the new law goes into effect, if the beneficiaries use money from a 529 plan for purposes other than qualified education expenses, any earnings from the non-qualified distribution could be subject to regular income taxes as well as a 10% penalty.

What important points and limitations should I be aware of?

  • The 529 plan must have existed for at least 15 years before it’s eligible for transfer.

  • The main beneficiaries of this change are the individuals benefiting from the 529 plan, not the owners of the plan. Funds from the 529 plan need to be directly transferred to the beneficiary’s Roth IRA.

  • There is a lifetime maximum transfer limit of $35,000 from a 529 plan account to a Roth IRA.

  • The usual contribution limits for Roth IRAs still apply. As of 2023, these limits are $6,500 per year for beneficiaries under 50 and $7,500 per year for those over 50. These limits can change annually.

  • While the usual income limits for Roth IRAs don’t apply, beneficiaries still need to have earned an income equal to or greater than the contribution amount in order to move funds from the 529 plan into the Roth IRA.

  • As of now, there are still uncertainties since SECURE Act 2.0 is relatively new. More specific guidelines from lawmakers are expected before the law takes effect in 2024. It’s also possible that individual states may have their own rules about transferring excess 529 plan funds to a Roth IRA.

If you have any questions, it’s a good idea to reach out to your financial advisor for more information and guidance.

By Published On: August 3rd, 2021

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Tara Bruce
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