‘The Big Money Show’ panel discusses why more Americans in their 40s are heading back to school, how A.I. is reshaping career paths and what the shift toward trade programs means for the future workforce.
Key Takeaways
- Inflation Hedge & Tax Efficiency: In an era of persistent inflationary pressures on education costs, 529 accounts provide a critical financial planning tool, allowing savings to grow tax-deferred and be withdrawn tax-free for qualified expenses. This tax advantage effectively amplifies purchasing power against rising tuition and training fees.
- Versatility for Evolving Workforce Needs: Recent legislative changes, including the SECURE Act and SECURE 2.0, have dramatically expanded 529 utility beyond traditional four-year colleges to include K-12 private school tuition, registered apprenticeships, and credentialing programs. This adaptability aligns with the dynamic labor market’s demand for specialized skills and continuous learning, offering flexibility in career path development.
- Strategic Multi-Generational Wealth Transfer: 529s are not just for education; they serve as robust instruments for estate planning and wealth transfer. Grandparents can leverage substantial gift tax exclusions to frontload contributions, removing assets from their estate, while beneficiaries gain the option to roll unused funds into a Roth IRA, jump-starting their retirement savings.
As American households navigate a volatile economic landscape marked by persistent inflation and a rapidly evolving job market, the strategy for funding education has never been more critical. While headlines often focus on the immediate financial strains of rising living costs, the long-term investment in human capital—education—remains a cornerstone of personal and national economic growth. Amidst this backdrop, 529 education savings accounts are emerging as an increasingly indispensable vehicle, offering a powerful combination of tax advantages and flexibility tailored for modern educational and career pathways.
Traditionally perceived as dedicated college savings plans, 529 accounts are typically opened by parents, guardians, or grandparents for minor children. Their core appeal lies in allowing savings to grow on a tax-deferred basis, with funds eligible for tax-free withdrawal when used for qualified educational expenses. This potent tax structure directly addresses the escalating cost of education, which has historically outpaced general inflation, eroding the purchasing power of conventional savings. Individuals are also increasingly opening 529 accounts for their own future learning and career development, reflecting a broader societal shift towards lifelong education.
“529s are the optimal vehicle for education savings, especially in today’s economic climate where every dollar saved needs to work harder,” commented Thomas Psaltis, director of education savings programs at Bank of America Merrill Lynch. “That growth in earnings, if used tax-free, can have a really significant impact on providing more money for education in the future for children and grandchildren, but also help combat the rising tuition costs that continue to challenge families’ financial planning.”
BANK OF AMERICA’S LEGACY OF BUILDING THE AMERICAN DREAM
Since their inception 30 years ago, the number of 529 plans has grown to 17 million accounts across the industry and has a total of more than half a trillion dollars in assets. (iStock)
Psaltis emphasized that beyond the primary tax benefits, 529 accounts now offer a degree of versatility that other tax-advantaged savings vehicles simply cannot match. This adaptability is particularly relevant given the tectonic shifts in the labor market, driven by technological advancements like A.I. and a renewed focus on skilled trades.
“One of the game changers is the versatility of 529 accounts,” he noted. “While traditionally designed for handling expenses at four-year colleges, they have grown significantly to go beyond just that. Some of the recent legislation, including the SECURE Act and SECURE 2.0, has expanded their utility.” He highlighted the allowance for K-12 private school tuition, which permits up to $10,000 annually per beneficiary to be used tax-free for primary and secondary education. “We’re now including registered apprenticeships and credentialing programs as part of qualified expenses that can be used tax-free as well,” he added. This expansion is a direct response to the “skills gap” in the U.S. economy, where demand for vocational and technical skills often outstrips the supply of four-year degree holders.
Advisors at Merrill Lynch actively encourage clients across all income levels to integrate 529 plans into their holistic financial planning. The growth trajectory of these plans underscores their widespread adoption: since their inception 30 years ago, the number of 529 plans has soared to 17 million accounts industry-wide, collectively holding more than half a trillion dollars in assets. Despite this prevalence, Psaltis points out persistent misperceptions that can deter families from leveraging this powerful tool.
SOUTHERN CITIES DOMINATE RANKINGS OF BEST JOB MARKETS FOR NEW COLLEGE GRADUATES
“There’s this common misconception that you have to fully fund college for a 529 plan to be worthwhile, and sometimes that perception can create unnecessary pressure and cause families to delay in getting started,” he said. “The biggest miss in that is the opportunity for that tax-free growth. Families who end up using taxable savings instead of a 529 may be giving up meaningful long-term returns that could be used tax-free.” In a market where investment returns are increasingly vital to outpace inflation, forfeiting tax-free growth represents a significant opportunity cost, directly impacting the ultimate value of their savings.
529 accounts can be opened by parents for the children to use for college and trade school expenses. (Valerie Plesch for The Washington Post via Getty Images)
From an estate planning perspective, 529 accounts offer compelling advantages. Contributions are considered taxable gifts, allowing individuals to contribute up to $19,000 per year per beneficiary without incurring a gift tax liability. A particularly attractive feature for high-net-worth families is the ability to “frontload” up to five years of contributions at once.
“Let’s say there are grandparents that would typically gift $38,000 annually for their grandchild’s 529 (i.e., $19,000 from each grandparent). The 529 code allows them to gift up to five times that – or $190,000 per beneficiary – in a single year,” Psaltis explained. “The contributions moved and the future growth of those contributions are generally no longer part of that grandparent’s estate, so long as they live for the next five years, it won’t be subject to a clawback or a prorated pullback.” This strategy can significantly reduce the taxable estate while providing substantial educational funding for future generations.
RECENT COLLEGE GRADS ARE LOSING THEIR EDGE IN JOB MARKET, STUDY SHOWS
One of the most common concerns for families is the fate of unused 529 funds if a beneficiary opts against traditional higher education or an accredited vocational program. Psaltis assures that the plans offer significant flexibility. There is no required distribution, allowing funds to be held indefinitely in case the beneficiary decides to pursue education later in life, perhaps in their 40s, a growing trend reflecting the need for reskilling and upskilling in a dynamic job market.
Unused 529 funds may be reallocated to another beneficiary, or can be rolled over into an IRA to jump-start retirement. (iStock)
“Holding onto it indefinitely, that child that doesn’t initially go off to college, well, maybe in a few years they decide they want to further their education either through college or an accredited trade,” Psaltis said. “You can switch beneficiaries at any time and for whatever reason, so if there’s unused funds, those monies could be shared with siblings or other eligible family members, providing a safety net for multiple individuals.”
“If all else fails, and you have an account open for 15-plus years, there’s still other options,” he added, highlighting a key provision of the SECURE 2.0 Act. “One of the key features that has recently occurred over the past few years is the ability to roll over a portion of your 529 proceeds—up to $35,000 over the beneficiary’s lifetime—into a Roth IRA on behalf of that beneficiary to sort of help jump-start their retirement, and that’s a really cool feature too.” This new flexibility bridges education savings with retirement planning, offering a unique benefit that underscores the evolving landscape of long-term financial strategy.
“At the end of the day, they’re not locked into those monies,” Psaltis concluded. “If for whatever reason they have to take that money back, they can always take that money back themselves, but just note that this would be treated as a non-qualified withdrawal and that account owner would be subject to income tax and a potential 10% federal tax penalty, but only on the earnings portion of the account.” This ensures a last-resort safety valve, albeit with tax implications, for unforeseen circumstances.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
Market Impact
The growing prominence and evolving flexibility of 529 accounts have significant implications for the broader financial market and consumer behavior. As educational costs continue their upward trajectory, 529s provide a crucial counter-inflationary mechanism, preserving capital for future human capital development. Their expanded utility, particularly into vocational training and K-12 education, reflects and reinforces a fundamental shift in the American workforce, prioritizing skills over solely traditional degrees and encouraging lifelong learning. For asset managers, the half-trillion-dollar-plus in 529 assets represents a substantial, stable pool of capital, often invested in age-based portfolios that influence demand across various asset classes from equities to fixed income. Moreover, the enhanced estate planning benefits and the Roth IRA rollover provision position 529s as integral tools in holistic wealth management, fostering multi-generational financial stability and resilience. This adaptability ensures that 529 accounts remain a vital component of the financial ecosystem, responding to and shaping economic trends while empowering individuals to invest in their future amidst an uncertain and dynamic global economy.