529 Plans for High-Income Families: Tax Rules, Ownership Changes, and Pro Tips

What Is a 529 Plan and How Does It Work?

A 529 plan, named after Section 529 of the Internal Revenue Code, is a tax-advantaged savings plan designed to help families pay for education costs.

While states administer 529s, you can typically use the funds at eligible institutions anywhere in the U.S. and even abroad.

There are two main types of 529 plans:

Why Use a 529 Plan? The Triple Advantage

Tax-Free Growth and Withdrawals

Money grows tax-deferred and can be withdrawn tax-free for qualifying expenses, such as tuition, books, room and board, or even K-12 education, up to annual limits. The SEC and IRS confirm that distributions for qualifying expenses are exempt from both federal income tax and capital gains.

Estate and Gift Tax Efficiency

This is where 529s shine for high-net-worth families. Contributions are considered completed gifts to the beneficiary, which removes them from your taxable estate, but you still retain control over the funds as account owner.

You can even superfund a 529, contributing up to five years' worth of annual gift exclusions at once. In 2025, that's up to $95,000 per donor, or $190,000 per married couple, per beneficiary.

Forbes calls this "one of the most underused estate planning moves for the affluent."

Financial Aid Benefits

Parent-owned 529 plans are counted lightly in the FAFSA formula, at roughly 5.6% of the assets' value, while distributions are not treated as income.

Under the new FAFSA rules, even distributions from grandparent-owned 529 accounts no longer count as student income, making them more aid-friendly than ever. However, private colleges using the CSS Profile may still count grandparent 529s differently.

Contribution, Gift, and Estate Rules

Annual Gift Exclusion and Superfunding Strategy

Each year, you can contribute up to the annual gift exclusion ($19,000 per person in 2025) to a 529 without triggering gift tax. Larger contributions can utilize the five-year election, allowing you to front-load up to $95,000 at once.

If you die within that five-year window, part of the contribution is pulled back into your estate. Still, the strategy remains incredibly powerful for reducing taxable estates and front-loading growth.

State Contribution Limits

Every state sets its own maximum aggregate limit, typically ranging from $235,000 to $550,000 per beneficiary. Once you hit that ceiling, you can't contribute more, but the account can continue to grow beyond it.

Qualified vs. Nonqualified Withdrawals

Withdrawals are tax-free for qualified education expenses, including:

• College tuition and fees
• Room and board (if enrolled at least half-time)
• Books, computers, the internet, and software
• Apprenticeship programs and certain professional certifications
• Up to $10,000 per year for K-12 tuition
• Up to $10,000 lifetime per person for student loan repayment

If funds are used for non-qualified purposes, only the earnings portion is taxed as ordinary income and hit with a 10% penalty. Exceptions exist for scholarships, military academies, disability, or the death of the beneficiary. (SEC)

Changing Beneficiaries and Ownership: What the IRS Actually Says

Changing Beneficiaries

If you change the beneficiary to another family member (like a sibling or cousin), it's typically not a taxable event. But if you move assets down a generation—say, from your child to your grandchild—the IRS treats it as a gift equal to the account's fair market value. That means a potential Form 709 filing and reduction of lifetime exemption.

Changing Ownership: Is It a Gift?

Here's the big question that sparks debate: Does changing a 529 plan's owner trigger gift tax?

According to federal tax law—no. Section 529 focuses on the beneficiary, not the owner. The owner is more akin to a custodian with control rights, rather than a beneficial owner.

So, if you transfer ownership from a parent to a grandparent but keep the same beneficiary, there's no taxable gift at the federal level.

However, as other sources note, a few state plans treat ownership changes as distributions and may issue a 1099. That's why you should always check the plan documents before making any ownership transfer.

In short:

• Parent → Grandparent (same beneficiary) = Generally not a gift.
• Parent → Grandparent (new beneficiary) = Possibly a gift.
• Parent → Grandparent, plan issues 1099 = Potential taxable event.

When in doubt, coordinate with a tax advisor before making the switch.

Coordination with Education Credits and Tax Benefits

529 plans can overlap with other education tax benefits, but you can't "double-dip."

For example, if you use 529 funds to pay tuition that you also claim for the American Opportunity Credit, the IRS will disallow one of them. A smart strategy: pay $4,000 of tuition out of pocket (to claim the full credit), then use 529 funds for other qualified expenses.

The 529-to-Roth IRA Rollover: A Game-Changer

One of the most exciting recent developments came from the SECURE 2.0 Act. Starting in 2024, you can roll over unused 529 funds into a Roth IRA for the same beneficiary, subject to these limits:

• The 529 must have been open for at least 15 years.
• Rollovers are capped at $35,000 per lifetime for each beneficiary.
• Annual Roth IRA contribution limits still apply.
• The rollover must be a direct trustee-to-trustee transfer.

This change gives unused 529 funds a new life as long-term, tax-free retirement savings—an elegant solution for overfunded accounts.

529 Plans and Financial Aid: The FAFSA Factor

Parent-owned 529s count as a parental asset on FAFSA, but distributions don't count as income. Grandparent-owned 529s used to be treated less favorably—but under the latest FAFSA simplification, distributions from grandparent-owned plans no longer count as student income.

Still, timing matters. If a grandparent plans to help with education costs, consider making distributions after the student's junior-year FAFSA is filed to minimize any potential aid impact.

Advanced Strategies: How Wealthy Families Maximize 529s

1. The "Dynasty 529" for Multigenerational Education Funding

A family can set up a 529 plan, fund it aggressively, and change beneficiaries over time as new generations go to college. Since the plan can stay open indefinitely, it becomes a multigenerational education trust with perpetual tax-free growth.

However, the IRS could challenge rapid succession changes as a "step transaction," so maintain clear timing and documentation.

2. Grandparent Superfunding

Grandparents can contribute up to $190,000 jointly in one year (using the five-year election) for each grandchild—immediately removing that amount from their estate while retaining control as account owners.

3. Strategic Ownership Changes for Financial Aid Optimization

Transferring 529 ownership to a grandparent (without changing the beneficiary) can, in some cases, improve a student's aid profile—particularly under the new FAFSA rules. But since plan-specific quirks exist, verify before making moves.

4. Estate and Gift Tax Synchronization

Couples can use coordinated 529 contributions as part of a broader wealth transfer plan. Combined with annual exclusion gifting and direct tuition payments (which are not considered gifts), this can meaningfully reduce future estate tax exposure.

Common Pitfalls to Avoid

• Assuming all expenses qualify: Room and board are only qualified if the student is enrolled at least half-time.
• Overfunding: You can now roll to a Roth IRA, but only within limits—don't lock up too much cash.
• Ignoring plan rules: Some states don't allow ownership changes, or they treat them as distributions.
• Double-dipping with tax credits: Always coordinate 529 usage with your tax advisor.
• Neglecting documentation: Keep records of contributions, ownership transfers, and beneficiary changes.

Putting It All Together: How to Make 529 Plans Work for You.

529 plans are far more than college savings accounts; they're versatile, tax-efficient, estate-friendly tools that can fund education for generations. Whether you're a high-income tech professional, an entrepreneur, an executive, or a grandparent looking to leave a lasting legacy, understanding how to structure and control your 529s can unlock serious long-term advantages.

Before making ownership or beneficiary changes, always confirm how your state plan handles transfers and coordinate with a qualified tax professional or CFP®.

Used strategically, a 529 isn't just about paying for school; it's about preserving wealth, maximizing flexibility, and building a financial legacy that educates future generations.

Frequently Asked Questions About 529 Plans