Back to School: How a 529 Plan Fits In Your Retirement Toolkit

We’re past Labor Day weekend. Temperatures are dropping. Commute traffic is heavier. It’s back to school season.

When we look at all the various financial instruments that can make up your retirement toolkit, a 529 plan might sound out of place. But the unique structure these accounts offer can make them an undervalued resource, particularly for retirees who want to help their family members with education expenses. So get out your notebook and put away your backpack — today’s topic is the 529 plan and class is about to start..

Jump to…

• What is a 529?
• What does this mean for a retiree?
• Ready to Take the Next Step?
• Citations and Disclosures

What is a 529?

A qualified education savings account, the 529 was codified by the 1996 Small Business Job Protection Act. Contributions are post-tax, so the distributions later are not taxable. Originally intended solely for higher education expenses, the accounts have expanded somewhat. Here in Missouri, for example, you can also use 529 funds to pay for K-12 expenses including private school tuition and fees. Like any investment account, these have very specific rules for the beneficiary structure and what expenses qualify, and because these rules vary state-by-state, it’s important to consult with an advisor about how these fit into your financial plan.

What does this mean for a retiree?

Many Chamberlin clients want to help their kids and grandkids with education expenses as part of their retirement and legacy plans. Because anyone can start a 529 plan or contribute to an existing plan on behalf of a loved one, these plans are great ways to do that. There are other reasons these accounts work in tandem with other parts of your retirement plan:

The Grandparent Loophole

529s owned by students or by their parents are considered as income for the Free Application for Federal Student Aid (FAFSA). Under new FAFSA Simplification Act rules, accounts owned by grandparents are not. This can help your student maintain eligibility for scholarships, grants and other student aid while still helping them with whatever expenses are not covered.

The Roth IRA Rollover

A major hesitation for people entering their retirement red zone is the fear of overfunding a 529 if the student gets a scholarship or decides not to go to college. The SECURE 2.0 rule, which went into effect in 2024, allows up to $35,000 of unused 529 funds to be rolled over into a Roth IRA for the beneficiary tax-free and penalty-free. There are caveats: the 529 must be open for at least 15 years, rollovers are subject to annual Roth contribution limits, and the beneficiary must have earned income.

The "Tax-Me-Never" Bucket

We heavily emphasize the three tax buckets to our clients — tax-me-now, tax-me-later, and tax-me-never. A 529 plan falls beautifully into the tax-me-never bucket when used correctly. The investments grow tax-free, and qualified distributions are tax-free, keeping the IRS completely out of the transaction.

The Legacy Plan

This ties perfectly into the legacy planning pillar of our holistic plan. Grandparents can use 529 plans to reduce their taxable estate while still retaining control of the account. They can even front-load five years' worth of annual gift tax exclusions at once without triggering federal gift taxes. It’s a proactive way to pass down wealth efficiently rather than leaving a chaotic tax bill for the surviving spouse or heirs.

The Sequence of Returns Mitigation

We always educate clients on how dangerous sequence of returns risk is during the decumulation phase, where bad market timing can drain a portfolio early. By shifting some wealth into a 529 plan now, they are giving those specific dollars a longer time horizon, essentially moving it into a "growth well" that isn't dependent on their own immediate retirement income needs.

Ready to Take the Next Step?

Don’t wait for “graduation day” (a.k.a. retirement day) to arrive before you start investigating 529s. Whether you are in the Accumulation, Planning, or Decumulation phase, you need a strategy that shifts the goal from growing wealth to using it the way you want to.

Ready to give your portfolio a "pop quiz"?

Schedule a 20-minute phone call with a retirement educator. They aren’t there to sell you products; they are here to help you understand your risks. On the call, don't forget to:

• Request a complimentary copy of Don Chamberlin's user guide to retirement, “The Wells of Wealth System” book.
• Ask to get started on your own customized No-Fee Mini Plan, which includes three vital reports: A Social Security Maximization Report, a Tax and Portfolio Audit, and your custom Wells of Wealth plan.

Don't leave your retirement to chance. Call us today and let's get to work putting together a plan for you!

This Mini Plan includes 3 essential reports.

1. Your Social Security Maximization Report,
2. Your Tax & Portfolio Audit,
3. And based on those first two reports, your custom, tailored Wealth of Wells Plan.

We used to charge our clients $2,500 for this comprehensive analysis, but we’ve made it free as our way of helping Americans create more predictable retirements.

(And don’t forget to ask your Retirement Educator about your free copy of “The Wells of Wealth System” book! We’ll mail it out within a couple days of your call at no cost to you.)

Even if you’re not quite ready to take that step, we still want you to feel knowledgeable and empowered as you move that direction. Check out the Learning Center on our website for videos and blog posts that will help you understand the different factors at play in a holistic retirement plan and how you can start making small changes today that will have a big impact tomorrow.

Citations and Disclosures

Disclosures

As of the writing of this blog post, the author is an investment adviser representative and supervised person of Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser. The opinions and assertions expressed in this book are solely those of the author and do not necessarily reflect the views of Foundations. Foundations’ involvement with this book has been limited to performing a high-level compliance review. No compensation related to this book will be directly or indirectly shared with or remitted to Foundations.

Any statistical data or information included herein has been obtained from third-party sources believed to be reliable; however, neither Foundations nor any third-party has independently verified such data and information. Foundations does not guarantee its accuracy or completeness, and neither Foundations nor the author has any obligation to, nor will they, update information that is later determined to be inaccurate for any reason (including becoming stale or outdated).

A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.