Robert Cole, president of Private College 529 Plan, a nonprofit prepaid tuition plan operated by hundreds of private colleges & universities
The long road to retirement is reaching its next stop for the nearly 60 million Americans aged 65 and older. A reality for many retirees is supporting children (or grandchildren) as they deal with rising costs—from everyday expenses to home and college costs. Consider this: According to a recent Pew Center Research poll, 56% of young adults (aged 25 to 29) still rely on financial support from their parents, a number that does decrease for those in their early 30s (33%) but remains a reality for many individuals.
Among the ways to support family members and maximize tax efficiencies are 529 plans. Because of their many potential benefits, 529 plans can be helpful for families when it comes to estate planning. Individuals can use 529 plans to reduce estate tax liability, maximize contributions through superfunding and provide allowances through rollovers to Roth IRAs, all leading to significant tax savings.
How 529s Can Help With Estate Planning
Before going any further, I’ll explain some important terms when exploring 529 plans and their benefits.
First is federal estate tax. This tax is imposed on property transfer after someone passes away and comes directly from the estate. The gross estate could include cash, real estate, trusts and annuities. Second, a dozen states and the District of Columbia impose a state estate tax, which applies to property transfer from an estate. The tax rate varies between each state, so it is important to check if and how much your state may impose on property. Finally, there is state inheritance tax, which is the responsibility of the person receiving property from an estate. Only a handful of states impose an inheritance tax.
In 2024, the federal estate tax applies to all estates valued at $13.61 million or above ($13.99 million for 2025), but barring congressional action to extend the Tax Cuts and Jobs Act’s higher estate tax exemption, the value amount is expected to drop by roughly half starting in 2026. This means more families could be taxed as they build wealth over their lifetimes.
Even though the estate owner is the 529 plan account owner, funds held in a 529 plan are excluded from the estate. This differs from personal investments, which count toward the gross estate. Because 529s are excluded from estates, they lower the taxable amount of the overall estate and ensure more funds remain with the owner or beneficiary. This means that federal and state estate tax as well as state inheritance tax do not apply to the 529, with only a few state-based exceptions.
The Superfunding Provision
While 529s reduce estate holdings’ tax liability, it is important to understand how to transfer funds into these accounts strategically. After all, according to attorney Jennie Lin in her article “529 Plans for Estate Planning and Retirement,” “The federal estate tax is technically an estate-tax-and-gift-tax, meaning that both your property at death and the gifts you made over your lifetime count toward the exemption amount.”
A gift could be any monetary amount, but you may want to consider some limits. As of 2024, the annual gift tax exclusion, which 529 contributions qualify for, is $18,000 per recipient or $36,000 for married couples filing jointly ($19,000 and $38,000, respectively, for 2025). This applies to all financial gifts in a tax year, not just contributions to 529 plans. Usually, anything gifted in a tax year that exceeds the exemption amount is added to an estate and would be included in the taxable estate. For example, if a married couple gifted their child $50,000 in 2024, the first $36,000 would be excluded from tax, while the next $14,000 would be added to the gifters’ lifetime exemption amount.
Now, here is where it gets interesting. 529 plan contributions are eligible for the superfunding provision, which allows individuals to front-load five years’ worth of contributions (currently $90,000, or $180,000 for married couples) in one tax year. This superfunding applies to each beneficiary.
Consider the following scenario. A married couple puts $180,000 in a 529 plan for each of their three grandchildren (i.e., three plans for $540,000 total). The superfund provision allows the grandparents to reduce their taxable estate by $540,000 while retaining control of funds as account owners of the 529 plans. This is significant tax savings while supporting their family’s future.
Rolling Unused Funds To A Roth IRA
Another benefit of 529 plans moves beyond direct educational support into generational wealth planning.
With the passage of SECURE 2.0, 529 account owners can now roll over a portion of funds into a Roth IRA. This change is a way for parents and grandparents to ensure that unused 529 funds continue to help their beneficiaries in the future.
Of course, there are some rules and restrictions. First, the rollover amount is restricted to the annual Roth IRA contributions limits. Also, the lifetime rollover amount is capped at $35,000 per beneficiary, so folks must remember that for planning purposes. Finally, the 529 plan must have been in the beneficiary’s name for at least 15 years, and any 529 contributions eligible for a rollover must have been invested for a minimum of five years, meaning newer funds would not be eligible.
Providing Financial Support To Loved Ones
As they continue to expand in flexibility, 529s are a nice tax-advantaged savings plan for parents and grandparents. In addition to using funds for qualified higher education expenses (tuition, fees, room, etc.), legislative changes have expanded the use of funds for qualified K-12 expenses, approved apprenticeship programs and student loan repayments.
Additionally, 529 account owners can roll over unused 529 funds (with certain restrictions) into a Roth IRA in the name of the beneficiary, keeping the savings with the beneficiary from one major saving event to another.
These expanded benefits join the list of traditional 529 benefits, including tax-free growth and withdrawals, the ability to change beneficiaries and retention of control by the account owner (e.g., the parent or grandparent). With expanded use, parents and grandparents have more flexibility with 529 funds regardless of what path their child or grandchild chooses.
By combining the power of estate planning with the tax advantages of 529 plans, new retirees can set themselves and their families up for financial success. As you transition to retirement, remember the power of 529 plans, promoting a successful future for loved ones and leaving a lasting gift of educational and financial support for your family.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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