A job done well requires mastering the tools of our trade.  Here, we introduce you to an enhanced use of a common financial tool – the section 529 college savings plan, used by many for the education of children, grandchildren, or other family members. Are you using this resource to its fullest potential? Are you using it to maximize your wealth, and the wealth of your family for generations to come?

How most people use the 529

If you’re not already familiar with the most basic use of the 529, it is designed to offer tax-free growth of invested money as long as the funds are eventually used for qualifying education expenses. Many states offer tax deductions or credits for contributions made to eligible plans. Contributions to the 529 are limited by the annual gift tax exclusion amount (currently $15,000 per beneficiary from any individual donor but indexed for inflation going forward) and must be made in cash and not equities.  Maximum lifetime contributions are set by the state.

Because planning to save enough money for college is a challenge for many families, the 529 is a helpful tool when used as designed.  In addition to its typical use, 529 plans are popular for other reasons among clients with accumulated wealth.

How a few people turn the 529 into a multi generational investment vehicle

Deductions, flexibility, and tax-free growth of invested funds make the 529 an uncommonly useful and effective wealth building tool. For example, the account custodian may change the beneficiary as long as the new beneficiary is related to the earlier beneficiary.  Wealthy families of one generation often use this strategy to set funds aside for a later generation, while reserving the right to adjust exactly which beneficiary eventually uses the funds for college expenses. In addition, it is allowable to front-load five years of such contributions as long as you track them across the following five years and keep in mind the lifetime contribution limits. And best of all, tax-free growth means the value of a 529 account can grow exponentially when the investment portfolio is invested over many decades.

Looking at the nuances of the 529 college savings plan, and guided by a skilled advisor specializing in strategies for the wealthy, allows you to envision more than “just” a college savings plan for your children. Examined in a different light, 529 plans open up the possibility of creating an educational legacy in your family for generations to come.

How it works

To illustrate the value of compounding 529 funds over decades, consider a couple who funds an account for a child (of any age) with a single contribution: a five-year forward deposit of $150,000.  Instead of using the funds in this account for the child’s college costs, they decide to let it grow for their grandchildren and future generations. Thirty years later, if the pool of assets grows at an average rate of 7%, there will be over $1MM in the 529, enough to fund the college costs of several grandchildren.  If left for the following generation, fifty years from deposit and investment, the account could be worth over $4MM, a true legacy account.  

Following the guidelines

As long as all funds are eventually used for qualified purposes, growth will not be subject to taxes, nor will the large asset become a part of the custodians’ taxable estate when they pass away. And although plan assets are held for the benefit of a student, decisions about the investment and distribution of the funds are determined by the account custodian.  This makes a 529 plan one of the few assets you can use to make a completed gift and still maintain control over the ultimate use of the assets.

If you feel this strategy may be helpful to someone you know, we encourage you to forward it on.  Find us at 800-888-7968 to discuss this wealth building approach or others like it.


Disclosure: The opinions and assumptions expressed herein are those of SYM Financial Corporation (“SYM”) and are subject to change without notice. SYM is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about SYM including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request.