Tag Archives: 529

Navigating the College Affordability Crisis using 529 Plans

9/2025

By Special Contributer, David Cicero, Ph.D.

Here’s a sobering statistic for you: college tuition has increased 1,200% since 1980! Inflation over that same time-period has been just under 400%, so attending college comes at a great premium these days. According to the Education Data Initiative, it currently costs an average of $27,000 to finance a year of education at an in-state University. Assuming the cost of college continues to increase at a rate of 4% annually leads to an expected cost for one year at an in-state public school 18 years from now of $55,000.

As a result of the rapid increase in the cost of education, the average new college graduate carries over $37,000 in debt. Worse yet, many individuals who could benefit from college simply do not enroll due to the high sticker price or end up missing out on schools that would have served them best. The evidence that a college education is worth the cost continues to be compelling. In 2023, college grads earn a 62% premium over high school graduates, which is up substantially from the 40% premium earned by college grads in 1990. There are good reasons to think that this premium will persist moving forward into the Age of AI as many high paying jobs will continue to require sophisticated workers.

Given the returns to higher education, it is essential that families plan wisely for their children’s college expenses. The best way to give young people a leg up when they hit the work force is to help them enter their professional lives with little to no debt that could hold them back financially and cause them to make sub-optimal career decisions.

The good news is that U.S. policymakers have provided an excellent means of saving for the rising cost of a college education – the tax-advantaged 529 education savings plans. Families can fund 529 plans with significant after-tax dollars each year ($19,000 per person/per year, $38,000 if a mom and dad each fund), and the earnings grow tax-free until they are withdrawn for qualified education-related expenses. You can even “super-fund” a plan by contributing up to $95,000/$190,000 all at once, but the excess above the annual gift limit would not be considered outside of the estate. The tax benefits are similar to those available under Roth IRA accounts, but there are no income limits for making contributions and the funds can be withdrawn without penalty at any age if they are used for qualified education expenses (which include many expenses beyond tuition as well as $10,000 of cost associated with K-12 or vocational education). The attractiveness of these plans was enhanced further in 2022 with new laws that allow up to $35,000 to be rolled into tax-free Roth IRAs for any beneficiaries that do not end up needing the funds for educational purposes.

Due to the power of compounding returns, we recommend prioritizing funding 529 plans when their children are young and consistently adding to these accounts over time. Here is a simple example. Assuming you can earn 6.5% annually on 529 plan balances, you can accumulate $100,000 for your child’s college education expenses at age 18 by contributing about $245/month from the time they are born. Wait until they turn 10 to start saving, and it will cost you $800/month to accumulate the same amount. If you start at the child’s birth, that $100,000 of college funds will cost you a total of $53,000 compared to $77,000 if you wait until age 10. Although $100,000 is unlikely to cover the full cost of college education in the future, having this amount set aside can make the full financial burden far more manageable. If you don’t like the idea of filling the funding gap down the road, doubling the numbers above can lead to $200,000 for college expenses. There is simply no better way to save for your child’s future education. To top it off, most states provide some level of tax deduction for contributions made.

But new research by economists at the University of Chicago shows that we are often not that wise, even when the calculus is clear. By analyzing over 900,000 529 accounts, Briscece, list, and Liu, show that many families fail to reap the benefits of this amazing vehicle for education savings. The reasons are mostly behavioral. For example, 61% of families that could afford to save enough in 529 plans to cover half of their children’s college costs fail to do so simply because they have the mistaken belief that their savings would be meaningless. They just do not understand the magnitude of the benefits that consistently stashing manageable sums into tax-advantaged accounts can have on their children’s (and their own) future. Not surprisingly, parents that score poorly on financial literacy tests are most likely to miss out on this opportunity. Although 79% of 529 account holders score high for financial literacy, only 32% of non-participating parents score similarly. The result is that due mostly to a lack of financial wisdom, many families miss out on one of the best opportunities available to help their children secure a bright future.

A competent financial advisor can help you navigate these issues and make sound financial decisions. It is easy to put vague questions about the potential cost of your children’s distant education on the backburner as you deal with more concrete financial issues in the present. But waiting is costly because you miss out on the magic of compounding returns in tax-favored 529 accounts. By starting early and saving with discipline, you will find that the overall cost of a high-quality education can be manageable. By minimizing the financial stress that can accompany dropping your kids off at college – which, believe me, comes faster than you think! – consistently putting even small sums into 529 plans will contribute to your family’s future joy and financial well-being.

Source:

Briscese, G., List, J., and Liu, S., 2025, Navigating the College Affordability Crisis: Insights from College Savings Accounts, National Bureau of Economic Research working paper 34126 (https://www.nber.org/papers/w3412).

David Cicero, Ph.D. is a Bray Distinguised Professor of Finance at Auburn University, https://harbert.auburn.edu/directory/david-cicero.html

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Secure Act 2.0

3/2023

By Louis Williams, CPA, CFP®

Secure Act 2.0 has become a hot topic of discussion in recent months, as this piece of legislation includes several law changes that have the potential to impact our clients’ financial circumstances and opportunities. After spending some time reviewing the subject matter of Secure Act 2.0, we wanted to highlight some of the changes that we feel are most relevant.1

Delay of Required Minimum Distributions from Retirement Accounts

Congress passed a law in 2022 that pushed back the age for required minimum distributions (RMDs) from 70.5 to 72 as long as you turned 70.5 after January 1st, 2020. Secure Act 2.0 has delayed RMDs even further for those born in 1951 and later. Depending on one’s date of birth, the age at which RMDs are mandatory could be anywhere from 70.5 to 75. In an effort to simplify this topic, we have included a summary table below.

Date of Birth RMD Age
Before July 1st, 194970.5
July 1st,1949-December 31st, 195072
1951-195973
1960 or later75

Changes to the Catch-Up Contribution

The ‘catch-up’ contribution within employer 401(k) retirement plans refers to a contribution that is allowed for individuals nearing retirement, and it is allowed in addition to normal retirement plan contribution limits. For 2023, the catch-up contribution limit is $7,500 and applies to those who are at least 50 years of age at the end of calendar year. Beginning in 2025, individuals who are ages 60-63 at the end of the calendar year will have the option to contribute $10,000 (or 150% of the standard catch-up, whichever is greater) in an expanded catch-up contribution.2

An additional change to the catch-up contribution will only apply to those whose annual income exceeds $145,000. Currently, most employer plans offer the capacity to make catch-up contributions on either a pre-tax or Roth basis. Beginning in 2024, however, those who exceed $145,000 in annual income will only have the Roth option.2 Roth contributions are made on an after-tax basis, and thus this move will increase current tax revenues from a government perspective.

Other Retirement Plan Roth Opportunities

As the Roth tax designation continues to become more prevalent, Secure Act 2.0 provides additional Roth opportunities relating to retirement accounts.

Among these opportunities is the option to make Roth contributions within Simple IRAs and SEP IRAs, which are retirement plans that are generally reserved for small employers and self-employed persons, respectively. Historically, contributions made to plans of this nature have only been treated as pre-tax.

Employer contributions within 401(k) plans have also historically been treated as pre-tax and therefore are not immediately taxable to the participant. Secure Act 2.0 allows for employer plans to offer the option for employer contributions to be treated as Roth. This would trigger the taxability to the participant in the year the contribution is made. The benefit of Roth contributions of any kind is to promote tax-free growth rather than tax-deferred, and this option would need to be carefully considered within the context of an individual’s financial plan.

529 to Roth Conversions

529 education accounts have long been considered to be the most tax-efficient savings vehicle for future education costs. One of the drawbacks of 529 accounts is that there is generally a penalty applied to earnings withdrawn from an account when funds are not used for qualified education expenses. As a result, most are careful not to ‘overfund’ these accounts out of fear of being subjected to this penalty. Beginning in 2024, Secure Act 2.0 provides a potential solution to this risk.2 529 account holders who meet a specific set of requirements will have the opportunity to transfer 529 funds directly to a Roth IRA. Eligibility for this type of transfer will need to be carefully determined, but it is certainly an option that should be considered for those with 529 assets that exceed education needs.

This summary is in no way meant to be a comprehensive analysis of the entirety of Secure Act 2.0, but we hope that the detail in this article can identify areas by which one’s financial plan can be enhanced. As with any law changes, it will be important to consult a financial professional before implementing any changes in response to this legislation.

Louis Williams, CPA, CFP® is a financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1For a complete Section by Section Summary of Secure Act 2.0, please visit https://www.finance.senate.gov/

2Secure Act 2.0 contains a number of important provisions that become effective in future years. We will continue to monitor these provisions for any new or clarifying legislation. The information in this article is as of March, 2023.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.