529 Plans: Powerful Education Tool or an Overhyped Account?

By: Nazzareno Spurio, CFP®

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I help families navigate the maze of saving for their children’s future. Among all the options, the 529 plan often takes center stage. But is it the undisputed champion for college savings — or an overrated choice in a crowded field? Let’s break it down!

Why People Default to 529 Plans?

No federal tax on qualified withdrawals – You don’t pay federal income tax on earnings if the money is used for eligible education expenses.

Tax-deferred growth – Investments grow without annual tax drag.

Potential state tax perks – Many states offer deductions or credits for contributions. For example, Virginia residents can deduct up to $4,000 per beneficiary, per year.

“Qualified education expenses” go beyond just tuition –

College costs- Tuition, fees, books, supplies, certain room & board.

K–12 tuition – Up to $10,000/year, per beneficiary.

Apprenticeships – Fees, books, and equipment for approved programs.

Contribution limits are generous – Contributions can often go over $300,000 per beneficiary (depending on the state) — making them useful for both college funding and estate planning (contributions are removed from your taxable estate).

Potential Roth conversions – Thanks to the SECURE Act 2.0, unused 529 funds can be rolled into a Roth IRA for the beneficiary (up to $35,000 over their lifetime) if certain conditions are met. With that said, please note that those contributions do count against your child’s annual contribution limit, so your child can’t double up their contributions.

Limitations of 529 Plans

Restricted use – You can withdraw funds for non-qualified expenses but you’ll pay federal income tax plus a 10% penalty on the earnings.

Not as liquid as other options – A taxable brokerage account lets you pull money for anything, anytime.

Lack of options – 529s are susceptible to underperform due to lack of investment options and the automated shift to a more conservative allocation as the child ages (in many cases).

Impact on financial aid – 529 plans owned by a parent count as a parental asset, which can reduce need-based aid eligibility slightly (typically up to 5.64% of the account value).

Market risk – Like any investment, your balance can go down if markets drop. This needs more attention as the child approaches these large expenses.

529 vs. Other Savings Options

Custodial brokerage account (UGMA/UTMA) – These are flexible. They can be used for anything benefiting the child. The downside is that earnings are taxed annually, and at age of majority, the money legally belongs to them (college or not).

Roth IRA – You can withdraw contributions anytime and earnings for education expenses without penalty (though taxes still apply to earnings). Lower annual limits ($7,000 in 2024, $8,000 in 2025) make it less powerful for big education goals.

Parent owned brokerage account – There is total flexibility, but you’ll pay capital gains taxes along the way.

Bottom Line

It depends. There is no one size fits all. If you’re curious how a 529 might fit into your family’s bigger picture — or if there could be other ways to get you there — my team and I can walk you through the options and put together a personalized roadmap for your goals.