Not All College Savings Vehicles Are Created Equal: Why 529 Plans Stand Out

When families think about saving for education, 529 plans often come with misconceptions – chief among them that these accounts are overly restrictive.  The rules around 529 plans have evolved significantly, and continue to do so, making them far more flexible than many realize.

The punchline? For dollars earmarked for education, the tax efficiency of a 529 plan can be a powerful advantage.  Understanding how these accounts work and how they compare to other options can help families make the most of their resources for future educational goals.

Other popular approaches to educational savings include funding taxable brokerage accounts in the parents’ name or custodial accounts, such as a UTMA, in the child’s name. Both approaches work, but they come with built-in tax drag.

• Taxable brokerage accounts Earnings are subject to ongoing taxes on dividends, interest, and capital gains, creating a “tax drag” that slows growth over time.
• Custodial accounts What many don’t realize is that custodial accounts are subject to something called the “kiddie tax”.  In 2025, the first $1,350 of a child’s investment income is tax-free, the next $1,350 is taxed at the child’s rate, and any investment earnings above $2,700 are taxed at the parents’ marginal rate.  Furthermore, these accounts can be far more punitive when it comes to financial aid.  On FAFSA, assets in a child’s name are assessed at 20%, compared to up to 5.64% for parent-owned assets.

By contrast, 529 plans grow tax-free, and withdrawals for qualified education expenses are also tax-free. While 529 assets are included on the FAFSA, they’re treated as parent-owned assets (if the parent is the account owner), which means they’re assessed at the much lower parental rate—helping preserve financial aid eligibility. Furthermore, grandparent-owned 529 plans are not reported at all, and distributions no longer count as student income under the new FAFSA rules, making grandparent-owned 529 plans one of the most powerful tools for families seeking to maximize financial aid eligibility.

From a planning standpoint, saving for educational expenses in a 529 is similar to saving for retirement in a 401(k) or IRA: you are sheltering dollars from unnecessary tax drag so they can compound more efficiently over time.

A series of legislative changes over the past two decades has evolved use cases for 529 plans.  Historically limited to college expenses, these accounts can now cover a series of lifetime educational expenses and can even help beneficiaries get a leg-up on retirement savings:

• K-12 school tuition became an eligible 529 expense in many states up to $10,000 per year, thanks to the 2017 Tax Cuts and Jobs Act. The 2025 Tax Act (effective 2026) increased these limits to $20,000 per year, including school supplies, testing, and tutoring.
• Career and vocational education expenses for apprenticeship programs registered with the Department of Labor are now eligible under section 529 as a result of the 2019 SECRE Act. Qualified expenses include fees, books, supplies, and equipment required for the programs.
• Roth IRAs can be funded with surplus funds. One knock on 529s of the past was that any leftover funds were difficult to repurpose without penalties.  The Secure Act 2.0, implemented in 2024, gives 529 account holders the ability to roll over funds (up to annual contribution limits for those with earned income) up to a lifetime limit of $35,000. This feature turns education savings into a long-term wealth-building tool.

These changes make 529 plans one of the most flexible and forward-thinking vehicles for family financial planning.

529 plans also offer a distinctive estate planning advantage: the ability to make a five-year, front-loaded gift. In 2025, the annual gift exclusion is:

• $19,000 per individual
• $38,000 for a married couple filing jointly

A 529 plan allows you to front-load five years of those exclusions into a single contribution. For example, a married couple could contribute $190,000 at once, have it treated as if spread evenly over five years, and allow the full amount to compound tax-free immediately.

This strategy accelerates tax-free growth, moves assets out of one’s taxable estate efficiently, and gives families a longer runway for compounding. It is one of the most powerful gifting structures available and unique to 529 plans.

Another key difference between 529 plans and custodial accounts is control. A 529 plan allows the account owner, typically a parent or grandparent, to retain full control indefinitely. They decide when the funds are used, they can change the beneficiary if needed, and ensure that dollars earmarked for education stay on track.

In contrast, custodial accounts become the child’s property at the age of majority, which is typically 21 in many states. At that point, the child has unrestricted access to the funds, even if a parent intended the money strictly for education. Many estate attorneys now note that “35 is the new 25” when thinking about heirs’ financial responsibility. For families who share this sentiment, the lifetime control that comes with a 529 plan can be very appealing.

Brokerage accounts and custodial accounts certainly have their place. But when dollars are specifically earmarked for education, the structure of the account can either enhance or erode their ultimate impact. 529 plans offer tax efficiency, flexibility,  and unique gifting flexibility with control, making them an especially strong tool for families focused on education planning.

Education is one of the most meaningful investments a family can make. The right savings strategy not only helps cover future costs but also provides clarity, confidence, and flexibility along the way.

If you would like to review your current approach or explore how a 529 plan could fit into your broader financial picture, our team at Bradley, Foster & Sargent is ready to help. We welcome the opportunity to walk through your options and build a plan that supports both your goals and the next generation’s opportunities.