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Dynasty 529 plans allow families to fund multiple generations’ college costs from a single account. Regular 529 college savings plans offer unique benefits. These can be powerfully leveraged when wealthy families take a very long-term perspective. By naming young beneficiaries and changing them over time, the assets can grow tax-free for decades. However, dynasty 529 plans have limitations like gift taxes on large contributions and successors possibly withdrawing the funds.
A 529 plan is a tax-advantaged account designed to encourage saving for education costs. Contributions grow tax-deferred and withdrawals are tax-free when used for qualified expenses like college tuition.
Regular 529 plans allow parents, grandparents and others to invest today to pay for a specific child’s future college costs. Dynasty 529 plans take the concept further by taking advantage of two key features:
- Beneficiaries can be changed at any time.
- There are no required minimum distributions, so funds can remain invested indefinitely.
By naming a young beneficiary, like a newborn grandchild, and periodically changing the beneficiary to younger generations as each enters college, a dynasty 529 allows assets to grow tax-free for decades. Each time one beneficiary finishes college, the account owner simply names a new beneficiary from the next generation.
This creates a perpetual education funding vehicle. A dynasty 529 could theoretically provide tax-free growth for 100 years or more, funding tuition for generations of beneficiaries from a single account.
More dynasty-friendly 529 plan features
There is also no annual contribution limit to 529 plans, and lifetime contribution limits per account range up to $500,000 or more, depending on the state. With no restrictions on investment growth, even a single upfront contribution could snowball into enough to pay for multiple generations’ schooling expenses.
Additionally, dynasty 529 plans have no age restrictions on the beneficiary. You can name an infant, a 10-year-old, a 30-year-old adult or even yourself as beneficiary. Beneficiaries can be changed to younger generations as needed. Assets can grow for decades regardless of any one beneficiary’s age.
The definition of who can be a 529 plan beneficiary is also broad. In addition to children or grandchildren, the list of those eligible includes extended family like nieces, nephews, cousins, aunts and uncles. Almost any family member descendant can receive the tax-free benefits.
Finally, there are no limits to how much a 529 account can grow tax-deferred. Even modest contributions could compound into substantial sums over decades or generations of tax-free investment growth.
Dynasty 529 plans in action
To see how a dynasty 529 plan might work, consider a couple who opens a dynasty 529 with $235,000. This is the lowest lifetime limit on contributions in some states. They name their newborn grandchild as beneficiary and invest aggressively for growth.
By the time the beneficiary turns 18, the account has grown to $450,000. This covers their four years of college tuition, fees, room and board at an in-state public school with $250,000 left over. The couple then name their next oldest grandchild as beneficiary of the remaining $250,000.
This grandchild attends a private university, where the account grows to $375,000 over four years. After paying their tuition, $125,000 remains to pass to the next beneficiary.
This cycle continues as the couple changes beneficiaries every four years or so, allowing their initial $235,000 investment to grow tax-free and fund education expenses for multiple descendants. With smart planning, the funds may never run out.
Limitations of dynasty 529 plans
While dynasty 529 plans offer appealing benefits, they aren’t for everyone. Limitations include:
- Not all states allow beneficiary and account owner changes.
- Large contributions may incur gift taxes.
- Successor owners could withdraw the funds or not follow your wishes, although using a trust can prevent this.
- Tax laws could change and restrict dynasty plans in the future.
- Investment losses could reduce principal available for future generations.
There are also costs to opening and maintaining accounts. And educational institutions or requirements may change over decades in ways that affect 529 plan usefulness and qualified expenses.
It’s always important to remember that investment performance is not guaranteed. Just like any investment, 529 account values can fluctuate up and down. Poor returns in some years could result in less funds being available for future generations.
Families interested in funding education over generations may also want to consider tools like Uniform Gifts/Transfers to Minors Act (UGMA/UTMA) accounts, savings bonds, prepaid tuition plans and Coverdell ESAs. None offer the exact benefits of dynasty 529 plans, but they have their own pros and cons.
Making the call on dynasty 529 plans
Important factors when deciding if a dynasty 529 plan meets your needs include:
- Your state’s allowed lifetime contribution limit
- Your state’s flexibility in changing beneficiaries and account owners
- Your education funding goals and time horizon
- Your appetite and need for tax-deferred growth potential
- Your investment risk tolerance
- Your estate planning situation
- Your income tax bracket
- The alternative education funding options you’re considering
Ideally, fund a dynasty 529 plan generously upfront and open it in a state allowing flexible successor rules. Carefully consider your local regulations, goals, time horizon and risk tolerance. These accounts involve complex restrictions and considerations and understanding them adequately may require professional tax and planning help.
Bottom Line
Dynasty 529 plans allow savvy families with significant means to potentially fund college costs forever. Because beneficiaries can be changed at any time and there are no required minimum distributions, funds can remain invested indefinitely and used to pay for education expenses for a succession of family members. But they require careful planning and aren’t right for everyone. These accounts involve complex restrictions and considerations and understanding them adequately may require professional tax and planning help.
Photo credit: ©iStock/damircudic, ©iStock/fizkes, ©iStock/monkeybusinessimages
Mark Henricks has reported on personal finance, investing, retirement, entrepreneurship and other topics for more than 30 years. His freelance byline has appeared on CNBC.com and in The Wall Street Journal, The New York Times, The Washington Post, Kiplinger’s Personal Finance and other leading publications. Mark has written books including, “Not Just A Living: The Complete Guide to Creating a Business That Gives You A Life.” His favorite reporting is the kind that helps ordinary people increase their personal wealth and life satisfaction. A graduate of the University of Texas journalism program, he lives in Austin, Texas. In his spare time he enjoys reading, volunteering, performing in an acoustic music duo, whitewater kayaking, wilderness backpacking and competing in triathlons.
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