Financial Advisor's Blueprint for Leveraging the Potential of a 529 Savings Plan
High-net-worth families seeking to save for their children's or grandchildren's education can benefit from a blended approach that combines a 529 plan with a taxable brokerage account. This strategy offers numerous advantages and considerations that cater to the unique needs of high-net-worth families.
Benefits of a Blended Strategy
A blended strategy provides several key benefits:
- Tax advantages: Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. This can significantly increase the total funds available for education compared to taxable accounts. Some states even provide tax deductions or credits for 529 contributions, enhancing the tax efficiency further.
- Estate planning: 529 plans can reduce the taxable estate of the contributor, which is advantageous for high-net-worth families planning to transfer wealth efficiently.
- Flexibility: Taxable brokerage accounts offer access to funds without the strict qualified expense limitations of 529 plans. This is useful for uncertain education paths, such as study abroad, gap years, post-graduate studies, or non-education needs.
- Investment control and diversification: Brokerage accounts offer broader investment choices, including stocks, bonds, and alternative assets, which can complement the 529’s typically limited investment options and age-based portfolios.
- Multiple beneficiaries and gifting options: Brokerage accounts can be used to support multiple children or grandchildren without the specific ownership rules governing 529 plans. Additional custodial accounts (UGMA/UTMA) and trusts can be used alongside this blend to meet complex legacy goals.
Considerations
While a blended strategy offers many benefits, there are also some considerations to keep in mind:
- Capital gains tax: Unlike 529 plans, taxable brokerage accounts do not grow tax-free. Realized gains and dividends are subject to capital gains taxes, which can reduce net returns over time.
- Contribution limits and gifting rules: 529 plans have annual contribution limits and gift tax implications to consider, especially in high-net-worth families making large contributions. Direct tuition payments (paying the school directly) can be a useful strategy to avoid gift tax limitations.
- Withdrawal restrictions: Funds must be used for qualified education expenses to avoid taxes and penalties. Families need to plan carefully or keep alternative funds available for non-qualified expenses.
- Investment restrictions and fees: Investment options within 529 plans are limited and may have fees. Families should choose plans with suitable investment options aligning with their risk tolerance and goals.
- Coordination with other financial planning tools: Families may want to complement blended strategies with education trusts or custodial accounts for more control or special needs considerations.
Recommended Approach
The recommended approach for high-net-worth families is often to allocate around 50% to 75% of expected education costs into a 529 plan to leverage tax efficiencies and estate benefits, while placing the remaining savings in a taxable brokerage account for flexibility and broader control.
Grandparents' Role
Grandparents can contribute annually to multiple 529 plans - one for each grandchild - as part of a broader multigenerational giving strategy. Grandparents can also pay a school directly without triggering gift tax limits through direct tuition payments.
Conclusion
A well-structured blended strategy allows families to pass on wealth with intention, aligning financial gifts with deeply held values such as opportunity, education, and self-sufficiency. 529 plans remain the gold standard for education savings, particularly for high-net-worth families who value tax efficiency, flexibility, and long-term planning. Research state-specific benefits when choosing a 529 plan, as some states offer added perks that can enhance the value of your contributions.
- High-net-worth families can expand their personal-finance strategies by investing in a blended approach that includes both 529 plans and taxable brokerage accounts, capitalizing on the tax advantages, estate planning opportunities, flexibility, and broader investment choices offered by this combination.
- For optimal results, high-net-worth families may opt to allocate between 50% to 75% of their anticipated education costs into a 529 plan, while placing the remaining savings in a taxable brokerage account, striking a balance between tax efficiencies, estate planning benefits, and investment flexibility.
