By Jackson Keenan, CFP®, Director of Financial Planning
Top 5 Takeaways:
- 529 Education Savings Plans offer tax-deferred growth and flexibility for a wide range of qualified education expenses which can be ideal for high-income families.
- State tax deductions or credits may apply, even though there’s no federal deduction for contributions.
- Overfunding can backfire so remember that unused funds face taxes and a 10% penalty on earnings. Planning is key.
- Alternative strategies include direct tuition payments (which avoid gift tax), trusts, and employer education benefits.
- Scholarships still matter as many are merit-based and don’t consider income.
Parents saving for their children’s college tuition and expenses becomes increasingly essential as college costs continue to rise. At MONTAG, our clients are high-income earners, which makes their funding options unique. In today’s post, I explore how they can save for college while taking advantage of potential tax benefits and wealth-building opportunities through a 529 college savings plan.
What Is a 529 College Savings Plan?
529 plans come in two forms: Prepaid Tuition Plans and Education Savings Plans.
Prepaid Tuition Plan allows you to lock in the future cost of tuition and fees at current prices. However, they are only applicable to participating colleges and universities for the beneficiary. State governments sponsor most plans and have residency requirements for the saver and/or beneficiary. The main drawback is if the beneficiary does not attend a participating school, the plan may pay out less. Currently, prepaid tuition plans are only available in a handful of states and through a consortium of private colleges, so I am not a big fan of these for most families.
To contrast, an Education Savings Plans allow you to save and invest for the beneficiary’s future qualified higher education expenses. These expenses can include tuition, fees, room and board, books, and computers at almost any US college or university, and some non-U.S. High-income individuals can contribute to 529 savings plans, which offer tax advantages and investment growth potential. Although contributions to 529 plans do not provide federal tax deductions, many states offer tax benefits such as deductions or credits for contributions. These plans allow for larger contributions, which can help high-income individuals save significant amounts for college expenses. But be forewarned, not using your 529 for qualified expenses results in federal taxes for the earnings portion of the withdrawal and a 10% penalty.
Additional College Savings Strategies
Employee Benefits
I recommend investigating to see if your company offers savings plans, tuition reimbursement, or scholarships for employees’ dependents. More importantly, these types of programs should not have income caps to limit participation.
Trusts
Trusts can allow trustees to distribute assets for the beneficiaries’ education, medical expenses, support, and maintenance. They are also a part of a broader estate planning strategy to reduce estate taxes. The drawback is, depending on the structure, an unwanted tax bill can be owed by the trust, the beneficiary, or the grantor.
Pay Directly
It is important to note that tuition checks paid directly to the university are not applied against your annual gift tax exemption (currently $19,000 per person for 2025) or lifetime gift exemption (currently $13,990,000 per person for 2025.)
Other Options
Regardless of income level, I recommend students apply for scholarships and grants. Many organizations offer merit-based scholarships that ignore parental income. In addition, Roth IRA earnings (not contributions) are subject to income tax if withdrawn for education before age 59½, and the 10% penalty is waived for qualified education expenses. Most of the time, however, a young student will not have a significantly funded Roth to tap into for tuition and other college expenses.
Citations:
IRS Publication 970 Tax Benefits for Education, Chapter 8.
IRS News “529 Plans: Questions and answers”.
IRS Exempt Organizations Technical Guide TG 44: Qualified Tuition Programs IRC Section 529
The information provided is for illustration purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action to be taken. These analyses have been produced using data provided by third parties and/or public sources. While the information is believed to be reliable, its accuracy cannot be guaranteed. MONTAG employees do not provide legal or tax advice. For specific legal or tax matters, you should consult with your own legal and/or tax advisors.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.