How to Pay for College Like a Millionaire

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If you have a 529 plan, you’re halfway there. 

Class is in session as Americans try to pay for the ever-increasing cost of higher education. One group that gets an A+ in saving for college? The wealthy. How do millionaires create generational wealth with nothing more than a 529 plan? Read on to find out.

Introduction to 529s

The 529 educational savings plan is almost as well known as its retirement plan cousins, the 401(k) and the IRA. However, before we break down the nuances of how the wealthy use a 529 account, let’s review the basics.

It all starts with a contribution. Contributions to a 529 account can be made by anyone. That includes parents, grandparents, aunts and uncles, and anyone else who wants to fund a child’s higher education. Typically, any one person can contribute up to $17,000 in a given year without worrying about your lifetime gift tax exemption.

The savings in a 529 account can then be invested. Investment options vary from state to state, but typically include baskets of funds ranging from conservative to aggressive. The most notable feature of a 529 plan is that the capital gains earned in an account are tax free if the proceeds are used for a qualified educational expense. This tax-free growth is key in encouraging Americans to save for higher education.

Thinking like a millionaire

There are two main provisions that allow the wealthy to build multi-generational 529 plans. Front-loading funding can put more money into an account quickly, while painless beneficiary changes allow that money to be used for many kids and grandkids.

One of the lesser-known features of a 529 plan is the ability to “superfund” the account. Instead of contributing $17,000 per year over five years, each donor can instead contribute $85,000 in one year and sit the following four years out. Hypothetically, a family with two parents and four grandparents could pack over half a million dollars into a 529 account in one year, provided they can pony up the cash.

College education is expensive, but likely not half-a-million-dollars expensive in most cases, so why would a wealthy family stash so much money in this account? Because they aren’t paying for just one child’s college education. One of the flexibilities of the 529 plan is that beneficiary changes are very easy. As long as the new beneficiary is a qualifying family member, the change will not incur any tax consequences. In wealthy families, once a child has completed their education, a 529 can easily be transferred to the original beneficiary’s sibling, cousin, or child. This tax-free multi-generational benefit has earned this strategy the name of a ‘Dynasty’ 529 plan.

How can you save like a millionaire?

At first glance, the ability of the wealthy to take advantage of the 529 plan may appear unfair. However, there is a very important lesson that the average American can learn from this strategy.

The reason why this strategy works well for the rich is that they plan it well in advance. If a funded 529 account is not given enough time to grow, there is little benefit to using it at all (it still might help save on state taxes). After all, a child’s grandparent could just give them $17,000 each year without worrying about the lifetime gift tax exemption. By saving early and investing appropriately, you get the power of compounding growth, regardless of what your net worth is.

529 plans are popular for a reason, and the wealthy aren’t letting the opportunity to grow college funds tax free go to waste. However, the average American should pay attention to the fundamental approach of saving early for college. The best part: you don’t need to be a millionaire to take advantage of this million-dollar strategy.

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