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Most families agree that 529 plans are one of the best options when saving for college. Between the tax-free earnings and flexibility of qualified use, families looking to provide education assistance for their children should take advantage of this savings vehicle.

If crafted and managed the right way, your 529 plan has the potential to go beyond the original plan beneficiaries. In fact, it can help cover education costs not just for your children or grandchildren, but their children as well. This is due in part to the fact that you can change the account owner and beneficiary multiple times, often penalty-free.

But first, you’ll have to make sure your account is in a position to span decades.

One strategy to ensure the longevity of funds in your account is to overfund it, which can be done periodically over the years or by a single large contribution. While 529 accounts do have maximum contribution limits, there’s no limit to how large these tax-deferred accounts can grow, and most states have a fairly significant contribution limit. And because you can “own” multiple 529 accounts, you’re free to open another account if your first is fully funded and benefit from the same tax-deferred earnings.

Forward funding a newly opened 529 account is another strategy that can be used. Though these accounts carry restrictions on how much you can contribute per year, you’re allowed by law to pay the first five years’ worth of contributions when you open the account—up to $75,000 per parent or  $150,000 for couple—as long as you don’t make any additional contributions for the next four years. But even if you never contribute another dollar, $150,000 left for 30 years at an average rate of 8% would grow to more than $1.5 million. That’s likely more than enough to fund education costs for several family members down the line. Michael Kitces provides additional examples of how this can be a powerful method for high net worth families looking to leave a lasting legacy in his blog post about multigenerational 529 accounts.  

Because 529 accounts do not expire, your money has the potential to grow for decades if properly maintained. But before heading down this path, there are many factors to consider. For instance, what if your children aren’t interested in attending a four-year college or if they choose not to have kids? Fortunately, you and your family would still have many options for using these funds.

While most people think of 529 plans as a means to pay for college, it should be more broadly thought of as a way to pay for post-secondary education because the money saved can be used at any institution of higher education that is eligible, like a vocational school, trade school or community college. If the school or university that your child is considering participates in a student aid program by the Department of Education, you will most likely be able to use funds from your 529 Plan to cover qualified expenses. Additionally, many states—including South Carolina—have adopted the federal provision which allows you to withdraw up to $10,000 a year to cover K-12 tuition expenses at a private school.

If you create a 529 account for your children and they end up not using it, you can transfer the funds penalty-free to another close family member. You can even name yourself or your spouse the beneficiary if either of you have an interest in pursuing additional education. And with the recent passing of the SECURE Act, beneficiaries can use assets from a 529 plan to pay off up to $10,000 in student loan debt. This amount is the lifetime maximum per person; however, you can use this tactic for multiple beneficiaries.

Of course, there is also the option to withdraw funds from your 529 account for expenses unrelated to education; however, it may not be something that we would recommend as you would be subject to tax penalties. But even if your great-great-great grandchildren choose this route as opposed to using the funds to cover educational expenses, they would likely be still be left with a bountiful nest egg. And if you feel strongly about the money being used for education only, there are options to help ensure it is used for its intended purpose by naming a trust as the successor owner.

An added value of investing in a 529 plan is that the funds you contribute are considered removed from your taxable estate. You can contribute up to $15,000, or $30,000 for a couple, to a 529 account each year and bypass the gift tax. But unlike other gifting programs, you maintain total control over assets in a 529 plan and reserve the right to ask for your money back at any time. This could be a smart way for affluent families to shift assets in a tax-efficient manner.

Between potential gift tax and Generation-Skipping Transfer Tax (GSTT) implications, properly maintaining a multigenerational 529 account will require special care; however, your advisor will be available to help you mitigate risk. If helping your family pursue secondary education is a goal of yours, connect with an NNP advisor today for more details on crafting a meaningful 529 savings plan.

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