529 Plans and College Savings: 4 Urgent Questions

Wealth Wise is Kiplinger's advice column on navigating retirement-related dilemmas. Got a question? See below for how to send it.

Dear Wealth Wise: With tuition for private colleges nearing $100k a year, I have four questions about college savings for a child or grandchild.

1. When should you start saving, and how much per year?
2. What happens to any excess money in a child's 529 after they have graduated?
3. Does bankrolling a four-year university still make financial sense given the job market and potential AI takeover?
4. Do you think lawmakers will change the rules on leftover 529 funds if college becomes increasingly less useful in the coming years?

— Stressed Saver

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Dear Stressed Saver: Any parent or grandparent trying to finance a child's education knows the struggle of balancing college savings with retirement savings. Still, many are willing to make sacrifices so their children or grandchildren can choose among universities without accumulating a massive pile of debt.

But with a weak entry-level job market and the possibility of AI taking an increasing number of jobs, some may be wondering just how much of an effort to make on the college savings front, and if a four-year degree is even worth it.

Those are exactly the questions one of our readers has for us. They want to understand how to prioritize college savings and whether a 529 plan is the right choice in today's changing landscape.

There's a lot to unpack here, so let's review what our experts had to say.

1. When should you start saving and how much per year?

Retirement savers have an advantage. They can begin funding an IRA or 401(k) in their 20s, potentially giving that money 40 years to grow. The window to accumulate college savings isn't as long, unless you're willing to start socking funds away for education prior to having kids.

Jonathan Codispoti, President at Legacy Wealth Strategies, says that if you're potentially looking to fund a $100,000-per-year education, your best bet is to start at birth. However, he cautions, "You can borrow for college. You can't borrow for retirement."

That's why he advises clients to first max out retirement plan contributions and then allocate what's left to college savings.

Michael Van Boening CFP and Director, Financial Planning at Mercer Advisors, agrees.

"Ideally, you should have a retirement plan of record that shows you are saving sufficiently for a successful retirement before starting to save for education," he says.

But Van Boening also says it’s important to start saving for college as early as possible to give your 529 plan time to compound and grow.

"A public four-year university could easily cost $150,000-$250,000 in future dollars. To fund the average public in-state school 100% in 18 years, you would need to save approximately $700 per month, or $8,400 per year," he says.

Codispoti says one way to get a head start on college savings is to take advantage of "superfunding." You can contribute up to $95,000 per child in a single year using the five-year gift tax averaging rule.

If you're a grandparent, there's a 529 loophole for you. Under FAFSA rules implemented in 2024, distributions from a grandparent-owned 529 account no longer count as student income, meaning they won't hurt a grandchild's financial aid eligibility in most cases.

2. What happens to excess 529 funds?

Some might say having too much money in a 529 plan is a good problem to have. Thankfully, it's less of a problem these days.

As Van Boening explains, "You can always move some or all of the 529 funds to another beneficiary within the family. This extends to siblings, children, grandchildren, even including first cousins."

Another option, he says, is to save the excess funds for the beneficiary's graduate or doctoral degrees. You can even make yourself the beneficiary and use the funds to attend classes to further your education. Plus, 529 plans can be used to pay for vocational school if your child decides not to pursue a traditional college education.

"Most 529 accounts do not have time limits when the money must be withdrawn, so the accounts could be used as an educational legacy for future generations," Van Boening says.

Another important thing to keep in mind is that under SECURE 2.0, excess funds in a 529 plan can now be rolled into a Roth IRA, up to $35,000. But there are some nuances.

"The annual limit is the Roth account contribution limit, and the rollover counts as the annual contribution to the Roth IRA," Van Boening says. As such, based on today's Roth IRA contribution limits, it could take several years to complete a $35,000 rollover.

Van Boening also explains that the beneficiary must match the 529 account beneficiary, and they must have earned income equal to or higher than the rollover amount. In addition, the 529 account must have been open for at least 15 years.

Codispoti calls this flexibility a game-changer.

"This eliminates the old overfunding penalty fear [for most savers]," he says. If you don't need the money for college, it still grows for retirement.

Still, if you've overfunded a 529 plan by $100K, your beneficiary will be on the hook for a 10% penalty and income taxes if they don't use the money for education. That said, proceeds from a 529 account don't incur taxes in many states.

3. Will lawmakers change the rules on leftover 529 funds?

Given uncertainty about the future need for a college degree, our reader wonders whether 529 rules might change even more if college enrollment wanes.

Codispoti's answer? Possibly.

"The trend is toward more flexibility, not less," he explains. Recent legislation already expanded 529 use for K-12, apprenticeships, and Roth rollovers, he says. "If enrollment declines persist, I'd expect further expansion rather than restrictions."

Van Boening has a similar take.

"It’s hard to predict future policy changes, but I would bet that future changes are more likely to increase flexibility than to restrict existing benefits," he says.

4. Does four-year college still make sense?

Even if you're able to juggle retirement savings and 529 plan contributions, you may be wondering if you should even be planning for your children to attend college given the uncertainty that abounds.

Codispoti says four-year college still makes sense. But, he says, "The ROI calculus has changed."

As he explains, a degree still correlates with significantly higher lifetime earnings versus non-graduates.

"However," Codispoti continues, "the real question isn't if college pays off. It's whether their child will graduate with a plan. The days of any degree, any school equaling automatic success are over. Targeted vocational paths, apprenticeships, and entrepreneurship are also viable routes worth serious discussion."

Van Boening, meanwhile, also says a college degree still makes sense, especially for in-demand professional careers.

"The data from the National Center for Education Statistics shows that those with a college degree earn about 59% more than those with just a high school diploma," he says.

But Van Boening also cautions, "It pays to choose wisely, though, because some degree programs do not have a good return on the education investment, especially if the chosen field is not in demand."

Bonus advice: consider the Roth IRA

Although our reader didn't ask this question directly, since they're asking whether a 529 plan makes sense to prioritize, we'd be remiss not to mention an alternative college-saving option — the Roth IRA.

Codispoti says that even though 529 plans now allow for a Roth rollover, "for parents who want maximum flexibility, prioritize a Roth IRA first. Contributions can be withdrawn penalty-free for any reason, including college. Then use a 529 for additional savings."

Van Boening, meanwhile, says that while you can use a Roth IRA to save for college, he still recommends 529 plans. But you should only fund yours up to a point.

"We typically recommend clients aim for saving 75% to 80% [of college costs] in their 529 accounts," he says. Often, he continues, "the remaining balance can be paid for through scholarships, grants, relatives contributing, or even the parent’s own cash flow or savings."

And don't forget that if you end up with a small college savings shortfall, your child can always borrow. So if you need to limit college savings to prioritize your own savings, you shouldn't think twice.

As Codispoti says, "Never sacrifice your own retirement to fund college. Your kid can get a loan. You can't get a retirement loan."

MORE WEALTH WISE ADVICE ON COLLEGE SAVINGS

• Should You Upsize When College Tuition and Retirement Collide?
• Should We Bankroll Our Son's $180K Law School Tuition Even Though We're Retired?
• 'Subsidized Adulting': Can You Afford to Help Your Children Financially?

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