Setting Up a 529 Plan: Benefits and Challenges - FCS

Setting Up a 529 Plan: Benefits and Challenges



For individuals with children, saving for college is essential to wealth management. For high-net-worth individuals, it’s important to consider college funding strategies because traditional financial aid or scholarship options may not be available to their children. 

Learning how to navigate college tuition without scholarships often requires the help of a financial advisor who can point you to the right strategies based on your family’s unique needs. Setting up a 529 plan is a common way to save for college, although it has unique benefits and challenges. You can also consider setting up a trust and other wealth management strategies.

At FCS Private Wealth Management, we bring decades of experience in assisting high-net-worth families navigate the process of paying for college. Whether it’s through setting up a 529 plan, establishing an inheritance trust, or a combination. A financial advisor can help you plan and strategize paying for tuition and other expenses that come with college.

College Funding Strategies

The most important thing to remember when starting to save for college is that time is your friend. Starting early allows your investments to grow and ensures there are adequate funds available when your child or grandchild starts college.

Using Your Annual Exclusions

Ultra-high net worth individuals can consider paying tuition directly and using your annual exclusion to remove the assets from your estate. However, using this strategy will only work for covering tuition costs directly, not for books or room and board.

Setting Up Trust Fund

Utilizing a trust vs a 529 plan can offer different benefits for wealthy families when it comes to planning for college. Trusts can be used for more than educational purposes and can provide for multiple beneficiaries. Ultimately, trusts offer more flexible and creative strategies for planning for your children’s future beyond college, or if they decide not to pursue a college education at all.

529 College Savings Plan

Setting up a 529 plan is a popular method for funding educational needs. It can provide for your family’s education needs from kindergarten through graduate school. A 529 plan is considered a tax-advantaged method because the investment can grow tax-deferred; some states even allow tax deductions for contributions to the account. 

Benefits of a 529 Plan

Two Types of Plans

There are two types of 529 plans: one is a savings plan and the other is a prepaid tuition plan. Both plan types have benefits. A savings plan allows you to make tax-free qualified contributions towards the beneficiary’s education. While a 529 prepaid plan can only be used toward tuition and fees, it does mean that you are guaranteed to pay the same tuition rate for your student throughout their college career.

Kindergarten through Graduate School

Previously, 529 plans were designated specifically for use at secondary institutions for undergraduate work. In a 2017 tax reform package, 529 benefits were expanded to include tuition for K-12 institutions, as well as postgraduate and professional institutions.


While your contributions to a 529 plan are not tax deductible at the federal level, your wealth is able to grow tax-free in the account and won’t be taxed when it’s taken out for qualified distributions. Contributions to a 529 plan may be tax deductible on the state level in some states.

No annual contribution limits

529 plans don’t have annual contribution limits. Though the aggregate contribution limit will vary by state, that limit is also very high.  Contributions to a 529 plan are however considered gifts for tax purposes at the federal level.  Therefore it may be important to understand the current federal annual gift tax exclusion prior to contributing to a 529 plan.  It may be possible to accelerate the gifting to a 529 plan while still using the federal annual gift tax exclusion. 

The plans typically allow up to 5 years worth of gifting in one year with the proper reporting to the IRS. This strategy uses up the federal gift tax exclusion amounts for future years up to a total of 5 years worth to that 529 plan at one time.  Therefore any additional gifts over that future time frame would not be offset by the annual gift tax exclusion until enough time had passed where the federal gift tax exclusion amount was available to use again.  For any additional questions we recommend consulting a financial advisor. 

Challenges with a 529 Plan

Limited to education funds

529 plans are only meant for qualified educational expenses. When you withdraw the money for a non-qualified expense, you will incur a penalty and will need to pay taxes on that withdrawal. You’ll want to avoid overfunding the account, and you’ll also want to ensure that your student plans on attending college. 

Related: What to do with unused 529 funds?

Only 1 beneficiary at a time

Unlike a trust fund, your 529 plan can only benefit one student at a time. However, it’s possible to transfer the 529 to a different beneficiary if necessary.

Rules vary by state

For 529 savings plans, you’re not limited to the state you reside in, but it’s important to know the rules of the state. (That’s where a financial advisor can be useful!) A prepaid plan may be the best option if you are a resident of the state and are sure your student will attend college in the same state.

Top Things to Consider when Saving College

You’ll want to consider where saving for college fits into your overall wealth management plan. At FCS, we focus on customized portfolio construction and investment planning that accounts for all of a client’s goals. 

Tax-Efficient Investment Strategies

Even if you can afford to pay for college outright, you can use a 529 plan or a trust fund as part of your tax-efficient investing strategy. You can use contributions to reduce your overall tax burden in your estate. Further, in some states, you’re able to frontload contributions to a 529 plan and avoid gift taxes. 

Starting Early

Time is your friend when it comes to saving for college. It’s important to start early so that your investment has time to grow.

Family Dynamics

Of course, it’s important to consider what your potential student wants when you’re budgeting for their education. Going to a traditional 4-year college is not the only viable option, so talking with your beneficiary about their goals is an important step. In some cases, it may make sense to use a trust fund vs a 529 plan.

Involving your beneficiary in the planning process is also a great way to introduce them to the world of wealth management and investing.

Why a financial advisor can help you save for college

College is a large expense, and even more so if your student decides to go to private school, or if you have multiple children or grandchildren to support through their education careers. 


Having a financial advisor can help you plan for this expense and strategically situate it within your larger wealth management plan. 

Questions to consider when starting a college savings plan

Are you paying for all or part?

Obviously, this question is important because it determines the amount you are trying to save. Do you plan to completely support your student financially, or will they be expected to contribute some portion of their college expenses? If the latter, what contingencies should be in place for them to use all or part of the funds?

Do you have multiple children to pay for?

A pretty straightforward question—if you have multiple future students in your household, that will impact your college savings plan.

Should you use a trust fund vs a 529 plan?

If you’re certain that your child will attend college and pursue further education, a 529 plan can be a wise investment. In the event your child has different dreams, you may want to consider a trust fund because it allows for more flexibility in how the funds are used. 

Related: Should I use a trust fund vs 529 plan?

How does a college fund fit into long-term wealth management goals?

This question is important to consider for yourself and also your student, who could potentially also be an heir to your wealth. Involving your child in the college planning process can be a great way to start educating them about the purpose of family wealth. Moreover, it’s necessary to consider the ways your college funding strategy fits into your tax plan or your retirement plan, and other goals you may have.

Why choose FCS Family Office

Our team brings both a broad and deep experience that we use to factor in everything from investments to college planning and philanthropy advisory for our Family Office clients at FCS.

We believe in the power of teamwork and in bringing the best people together to provide you with customized, effective guidance in all areas of your financial life. Your financial team consists of a Wealth Advisor, Family Investment Advisor, and Family Services Coordinator that will work together to create a comprehensive plan for your family, including developing a college funding strategy.

Our clients have trusted our small, respected team of advisors for over 30 years. We offer the intimacy of a boutique, with the same access to resources as the largest and most sophisticated wealth management firms in the world.

Start your college savings plan today

At FCS Private Wealth Management we know that traditional financial advisors and asset management aren’t enough. That’s why we develop customized, individual plans for all of our clients. Every client has their own unique hopes and goals for their wealth, so we work with them to discover the purpose of the wealth and devise a plan that pursues success.

It’s never too early to start planning for your child’s future. Reach out to an FCS advisor today to start the conversation about college funding strategies.

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