The 529 Trap Rich Families Need to Avoid

FULL EPISODE AND SHOW NOTES: www.sunnybranchwealth.com/blog/2026-529-trap

Saving for college when you're rich isn't the easy answer everyone thinks it is.

It should be as simple as maxing out your 529, right? 

Wrong.

What looks like a tax advantage could actually be limiting your kid’s future freedom.

This episode will tell you everything you need to know to fund your 529 smarter, not harder.

When you’re wealthy, it’s not about avoiding student debt. It’s about maximizing flexibility and taking advantage of strategies like:

• UTMA accounts
• Earmarked brokerage accounts 
• Dynasty 529s (but be sure and think this one through)

Check out this episode before putting another dollar into your 529.

Sunnybranch Wealth LLC (“Sunnybranch Wealth”) is a registered investment advisor offering advisory services in the State of Oregon, the State of California, the State of Washington, and in other jurisdictions where exempt. Registration does not imply a certain level of skill or training.

The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site. 

Transcript

Hey, I'm Katherine and thanks for joining me at Heir Necessities, the podcast that turns complex financial topics into real talk for Gen X, Millennial, and Gen Z inheritors.

Each episode of this podcast, I break down a different topic related to generational wealth and inheritance.

My goal is that you can stop trying to figure out what to do with your money by asking Google or ChatGPT what to do and come here instead for real talk, real solutions, and real advice that you can start implementing in your life today.

How Should Wealthy Families Save for College?

In this week's episode of Heir Necessities, I'm breaking down a question that I get asked a ton.

It all boils down to, I'm rich, I'm gonna inherit millions, maybe I already have, how should I be saving for college?

I don't know what to do, I don't know how much money to put into a 529, and I don't even know if there are other options out there that I should be considering.

We are going to get to all of it today.

But before we do, a quick plug. If you have been enjoying Heir Necessities, I'd be so appreciative if you could take two seconds and give the show a five-star rating wherever you listen to podcasts.

Spotify, Apple Podcasts, your preferred platform. It is hugely helpful for the show and it helps me connect with and support more inheritors like you.

Now, let's dive in to college funding.

What Is a 529 Plan and How Does It Work?

Everyone knows basically what a 529 is, or at least they know that the numbers 529, when pushed together, are about saving for college.

But a lot of people don't actually understand what a 529 does.

And that is where we're going to start this discussion today, at the real basic building blocks of saving for college.

At its core, a 529 is a tax-advantaged college savings account.

How Do You Fund and Invest in a 529 Account?

You can think of it kind of like an IRA for saving for college. You put money in there, it has to be cash.

You can't transfer positions into a 529. And that money is invested in the stock market in the portfolio of your choosing.

It grows and grows and grows. Theoretically, hopefully the stock market grows as your kid gets older and older and older.

Then when your kid is ready to go to college or is in school, you start taking money out of it to pay for tuition, room and board, books, the whole thing.

What Are the Tax Advantages of a 529 Plan?

There are two key pieces of the tax advantages of 529s.

The first is that while that money is in the 529 account, you aren't being taxed on growth.

So if you have funds in that 529 account that are spitting off capital gains, that are spitting off income, it's just like an IRA in that regard.

You aren't paying tax on anything that happens inside the 529 account.

How Does the 529 Withdrawal Tax Benefit Work?

It is just happily growing along doing its thing getting ready for you to pay the astronomical costs of what college will be in 18 years.

The second tax advantage piece of a 529 account is that when your kid goes to school any withdrawals used to pay for qualified educational expenses.

Again, that's room and board, tuition, books, a laptop, other educational supplies.

You can withdraw that money from a 529 account tax free.

What Does 529 Tax-Free Growth Actually Look Like in Practice?

Let's say that you put $150,000 into a 529 account when your kid is one year old.

And the market does incredibly. It's invested the whole time in a very aggressive portfolio.

And when your kid is 18 they're heading off to school that account is worth $500,000.

That's $350,000 of growth in that portfolio that you have not paid tax on.

Why Is a 529 the Most Tax-Efficient Way to Save for College?

And your kid is going to Stanford, it's a private school, it's expensive, so they're going to use up every penny of that $500,000 and then some paying for college.

But when you withdraw money from that 529 account, you are not paying taxes on any of it.

So it's pretty clear that in terms of saving for college, a 529 is the way to go because you get this double tax savings.

What Is the Biggest Downside of a 529 Plan?

The trick of it all is that while 529s are far and away the best, most tax efficient way to save for college, they are also the absolute worst way to save for anything that is not college.

And that's because let's say that same kid decides to go to trade school instead of to Stanford.

They have this 529 that's worth $500,000 and their trade school is like $50,000 a year for two years.

So now they have $400,000 sitting in this 529 account.

Can You Transfer 529 Funds to Another Family Member?

And yes, they could transfer to another beneficiary, to a sibling, to a cousin, to their own kids at some point in the future.

But you don't want them to do that. This is the money that you've saved for them.

You want them to have access to this money.

What Are the Tax Penalties for Non-Qualified 529 Withdrawals?

Well, every dollar that they pull from that 529 account that is not used to pay for a qualified educational expense is taxed at ordinary income rates.

So one, you don't get the preferential capital gains tax treatment if you pull out money from a 529 and it's not used for educational expenses.

It gets taxed at your ordinary income rates, which is not ideal.

But then there's also a 10% penalty that the government puts on top of that tax rate for any withdrawals not used to pay for qualified educational expenses.

Why Are 529 Plans Tricky for High-Net-Worth Families?

And this makes 529s a very tricky savings vehicle for families with a lot of wealth.

This is the crux of the problem, because you want to save into a 529 to get that tax advantage, but at the same time, you don't necessarily want to overfund that 529 unless you're trying for a dynasty strategy, which I'll talk about a little bit later on in the episode, because now this money is locked up and maybe your kid doesn't want to go to grad school.

And so it's just sitting there and it could be money that they would have had access to for starting a business, buying a home, getting married, whatever it was, and they can still access the money.

It's not like it's locked up away from them, but they can't get to it without paying a pretty significant tax penalty, which makes it not ideal.

How Much Does College Actually Cost for Wealthy Families Today?

Then the next question, once you understand what a 529 account is and the pros and cons of the thing, what are you supposed to do with that information?

Especially when college costs as much as it does right now and as it is projected to in the future.

Let's just break that down for a second. Right now all in costs at a top tier private institution are gonna run you $80,000 to $90,000 a year.

For four years of undergraduate tuition, you're looking at $360,000 to $400,000.

What Will College Cost in 15 Years for Today's Toddlers?

And if you haven't noticed, college costs are increasing at a much higher rate than the rate of inflation.

If you run these numbers out, and I do for myself and for my clients, if you have a three-year-old kid, a four-year-old kid, and you project out what it could cost to go to Stanford or even to a state school in 14, 15 those numbers get terrifying.

They're just big. Even if you have the money to afford them, it's painful to think about college costing that much.

Why Are Wealthy Parents Rethinking How They Save for College?

And in the face of those huge numbers, a lot of wealthy families are starting to make different decisions about how they want to save for their kids.

Because while we all value higher education and want our kids to get ahead in life, there's a bigger and bigger sense among Gen X and Millennial parents that it's kind of a racket, right?

Even if you don't have to take on debt, there may be a way that you could get the same quality of education and set yourself up for the same future with a lower price tag.

Should You Avoid Overfunding a 529 Plan?

And if you think that you want to give your kids that flexibility and encourage them to think about options and creative ways to fund their schooling, then you might not want to put $400,000 or $500,000 into a 529 because you want to leave that flexibility for your kids.

You're still going to save that money for them, but the 529 might not be the right place to do it.

Which brings me to our next topic, the UTMA account.

What Is an UTMA Account and How Does It Work?

UTMA stands for the Uniform Transfer to Minors Act and it is a custodial account that you create and manage for your child and then your child gets control of those funds when they hit the age of majority which depending on the state you live in could be anywhere from 18 to 25.

A lot of parents are choosing to fund 529s up to $100,000, $150,000, $200,000 and then basically say that's enough for now.

I'm going to see what my kid wants to do as they get older. They're only four years old.

How Does a UTMA Account Compare to a Taxable Brokerage Account?

And instead, I want to start saving money into my kid's UTMA account because a UTMA account functions just like a taxable brokerage account that you as an adult would have, except that it is intended to be used to support your child.

This is what I have done personally.

Both of my kids have $100,000, maybe $120,000, somewhere between $100,000 and $120,000 in their 529 plans and that is all we put in there.

Why Cap Your 529 Contributions Even If You Can Afford More?

I recognize that if they end up going to a top tier school, that $100,000 could be one year of tuition and I am possibly sacrificing tax benefits, but I also don't want to emphasize importance and the price tag of education above all else.

If my kids want to go to community college for two years and then transfer to a state school to save money so that they can have that money to do something else with down the line, I am all for it.

I want to encourage them to find savvy solutions to fund their education so that they end up with the most amount of money at the end of the day.

What Is the Real College Savings Question for Wealthy Inheritors?

The question that I am navigating, and this is the question that my clients and probably you, if you're watching this, are navigating is not so much how can I save so my kids don't have student debt.

My kids are not gonna have student debt. Your kids are probably not gonna have student debt either.

The question is how much are they going to end up with after college and do I want them to have more or do I want them to have tapped out the savings that are available to them?

How Do You Choose Between a 529, UTMA, and Brokerage Account Strategy?

If you want them to have more, then the best way to save is going to be to get your 529, again, up to that $150,000, $200,000, and then push money into a UTMA account.

If you want them to basically exhaust what they have in the 529 and then have to figure it out for themselves, which is still a strategy, parents do money differently, then you should be saving that money that you would have been putting in their 529 in a taxable brokerage account that you have earmarked specifically for that child or children.

Why Use an Earmarked Brokerage Account for College Savings?

It doesn't have to be in a UTMA account, which ultimately will give control to your children when they hit the age of majority, but it should be in a separate account that even if it's just a taxable brokerage account in your name, you know this is the account that I have earmarked for paying for college.

And if they don't use it all for college that it could be for a wedding, for a down payment to help them start a business, take an adventure, whatever it is, whatever you value and want to provide for them as a parent.

Why Aren't 529s Enough for High-Net-Worth Inheritor Families?

Ultimately, the key piece that I want inheritors and wealthy parents to understand is that, yes, 529s are an incredible educational savings vehicle, but when you are at the level of wealth where you have gifts to your kids coming in of $40,000 each per kid per year, a 529 is not going to be an appropriate place to put all of those gifts.

It is for a certain amount of time, but then ultimately the account is gonna get too big and you'll wanna look at different funding strategies.

With that being said, there is also a really cool opportunity for families who highly value education and want to create a generational education strategy.

What Is the Dynasty 529 Strategy for Generational Education Wealth?

It's referred to as the dynasty 529 strategy.

And basically how it looks is that parents, whether that's you, your parents, whoever it is, fund a 529 for individual beneficiaries up to the highest level.

Most of these 529 accounts, you can have $400,000 or $500,000 in them.

So they create all of these different 529 accounts that are max funded.

How Does a Dynasty 529 Pass Education Wealth Across Generations?

And then the goal is that yeah, your child is not going to use all this money for their education.

But when your child has a kid or if your child doesn't have kids, your child's sibling's kids, it will also exist to pay for their education and then on down the line.

Is the Dynasty 529 Strategy Actually Worth the Risk?

I think this is an interesting strategy for parents that are very education focused, but ultimately it seems a little risky to me to assume that 529 accounts are still going to be in existence and still be as valuable as they are today in 60 years.

But if you have enough money to try it out, it's something that you definitely consider or that you could bring up to your parents if you feel like it might be a gifting strategy that would really vibe with them.

How Do You Get Personalized College Savings Advice as an Inheritor?

Saving for college when you're rich is a lot easier than not having enough money to pay for your kids to go to college, but it still comes with its own special set of questions and concerns.

If you're trying to figure out how to navigate this in your family, whether it's how much to give your kids or how much you should ask for from your parents for your kids, reach out to me.

Where Can You Connect With Katherine Fox and Sunnybranch Wealth?

You can shoot me an email at katherine@sunnybranchwealth.com, or send me a DM on Instagram @sunnybranchwealth.

And if you're not ready to chat in real time yet, totally fine. I'll catch you on next week's episode of Heir Necessities.