This Week’s Blog Is Written By Scott Heins, CFP®, IAG Chief Investment Officer
August 20, 2025

On Monday my daughter started her sophomore year of high school, today my school librarian wife begins a new school year at our church’s school, and tomorrow we travel to UW-Whitewater to drop off my son’s belongings in his dorm room.

Saving for educational costs has improved incredibly over the last 40 years. In the olden days, parents used Uniform Transfer to Minor Act (UTMA) accounts that shifted taxes to their low-tax-bracket children, but also ceded control over the assets when children reached the age of majority. UTMA accounts still exist, but are generally not used to save for college.

In 1998 Coverdell Educations Savings Accounts (ESAs) arrived. ESAs were a new tax-free account to save for college, but they had low contribution limits ($500 per year) with income phaseouts. Changes in 2001 permitted tax-free withdrawals for K-12 education expenses and increased the contribution limit to $2,000 per year. While ESAs still technically exist today, their limitations make them unappealing.

The clear winner in the education savings tool race is the 529 plan which was incepted in 1996, but only gained momentum when the plans’ federal tax-free status for qualifying post-secondary withdrawals was made permanent in 2001.

From there, Congress consistently expanded that definition of qualifying 529 plan distributions – adding (among many others) K-12 tuition up to $10,000 per year, additional college costs beyond tuition, and up to $10,000 of lifetime student loan payments.

Just this July Sections 110110 and 110111 of the new tax legislation further expanded federal qualifying 529 plan distributions to include the following:

1. Up to $20,000 per year for K-12 education expenses
2. K-12 education expenses now include curriculum materials, books, and tutoring
3. Classes that prepare students for licensing exams
4. Certain workforce training programs

And if the account beneficiary does not use the entire account balance despite all these qualifying expenses, the 529 plan account owner has the option of switching beneficiaries to another family member (restrictions apply), gradually funding a Roth IRA for the beneficiary up to $35,000 lifetime (restrictions apply), leaving the account open for potential future educational expenses, or making a nonqualifying distribution to close the account (which results in federal taxes and penalties on any earnings).

So what is not to like about 529 plans? Uncertainty.

Not uncertainty from a legislative perspective (which is unusual), but uncertainty regarding what post-secondary education will entail when today’s infant finishes high school. Post-secondary education appears to be in the very beginning stages of fundamental change thanks to disruptive technology.

There will certainly be a need for individuals with advanced degrees in the future, but will a college degree be necessary for every occupation for which it is required today? We simply don’t know. Thus, unless you are planning on using 529 plan distributions to pay for elementary or secondary education costs, it may be prudent to take a modest approach to 529 plan contributions to maintain your flexibility.

Contributing $75 per month to a 529 plan from a child’s first month of life to their eighteenth birthday would provide them with over $29,000 toward their potential post-secondary education costs (assuming a 6% annual growth rate). This is a significant sum, but also within the $35,000 lifetime limit on transfers to a Roth IRA in case the infant opts not to attend college.

Additional college savings (if desired) could be accumulated in a taxable investment account in the parents’ name or, if you are completely averse to taxes and qualify, Roth IRA accounts. Using these options allow you to retain control and flexibility to use the funds for non-education costs in the future. Yes, there is likely a tax cost or complexity cost to this strategy, but the benefit is financial freedom.

We are always happy to help you think through the various options you have to save for your child’s or grandchild’s future education cost. The good news is you have plenty of options. The bad news is we can’t predict the future.

Quote of the week: James Clear: “The beginner chases the right answers. The master chases the right questions.”

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through IAG Wealth Partners, LLC, (IAG) a registered investment advisor and separate entity from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Any opinions are those of IAG and not necessarily those of LPL Financial. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. No strategy assures success or protects against loss. Investing involves risk including loss of principal.

Be sure to consult with your tax professional before making any tax-related decisions as each individual’s tax circumstances are unique.
Any favorable state tax treatment for investing in a 529 plan may be limited to investments made in a plan offered by your home state. Please be sure to consult with your financial, tax or other financial professional to learn more about how any state and federal based benefits (including any limitations) would apply to your specific circumstances. You may wish to contact your home state or any other 529 plan to learn more about the features, benefits and limitations of that state’s 529 plan.

ART: 785162-1
Photo Credit: iStock 2198907844