Six questions to ask to choose the path that has the best outcome for your kids — and for your retirement.

Key Takeaways

• It’s not 529 or a trust. The smartest plans use both
• Fund education with a 529 first, then layer in a trust
• Today’s 529 goes from kindergarten to a first Roth IRA
• When control and flexibility matter, a trust fills the gaps
• Fund their future without forgetting your own

For many parents and grandparents, saving for a child’s education is one of their highest financial priorities, yet it often comes with difficult decisions: How much should they save for a child's future without compromising their own financial security? What is the best vehicle to do so? Are there various strategies to achieve this goal?

For millions of families, a 529 College Savings Plan is the backbone of that strategy, offering an attractive tax-free route to accumulate funds for qualified higher education expenses as well as primary and secondary school. Much like Roth IRAs, 529 plans are among a handful of investment vehicles that offer both tax-free growth and tax-free distributions. Their popularity continues to grow: the average 529 balance stood at roughly $34,000 at the end of 2025, with nearly 18 million accounts open nationwide and more than $600 billion invested (Source ICI Statistical Report December 2025).

Yet a 529 plan may not suit everyone’s needs. Its tax-exempt status comes with contribution, distribution, and investment limitations. Distributions must be used for qualified expenses, or a family may face taxes and penalties. For some families, these limitations may call for a different or supplemental path: A Trust set up with specific objectives and needs in mind offering greater flexibility.

The right way to think about these options is as different tools to achieve a similar goal rather than an all-or-nothing choice. The right combination of accounts can help fund education while preserving flexibility for the rest of life's goals. Below are six questions that we ask families to work through when considering how they want to allocate funds.

1. How important is investment choice flexibility?

529 plans are not brokerage accounts and are designed to invest cash in the investment choices available on the particular platform. These usually consist of a menu of mutual funds which offer an age-based, risk based, or self-directed approach. If that is the only form of investing you intend to do, a 529 plan suits your needs well.

Trusts can hold a much broader range of investments than 529 plans. If you want greater control over security selection and want to include a broader range of assets such as real estate, business ownership interests, or even life insurance, a trust offers far more investment options. This option can be particularly valuable for families with investment property or privately held businesses. However, greater flexibility comes with greater complexity, oversight, and tax tradeoffs. Undistributed trust income can be taxed at tax brackets that reach the highest marginal rate at just $16,000 of income in 2026, much sooner than individual tax returns.

2. How important are gifting contribution limits?

Contributions to a 529 plan are not capped by the IRS, but amounts exceeding the annual exclusion amount ($19,000 per person, per recipient in 2026) generally require the filing of a gift tax return, even though most families will not owe gift tax. Unlike trusts, 529 plans are also subject to aggregate contribution limits set by each state’s plan, though those caps are now high in most states. One beneficial feature of 529 plans is that contributors can front-load, or “superfund”, five times the annual gift tax exclusion up front — $95,000 per beneficiary, or up to $190,000 for a married couple electing to split gifts. Once done, no additional funds can be gifted for the next 5 years without a gift tax return being filed. If a grandparent plans to make a significant gift exceeding the aggregate limit, a trust may be a preferred vehicle, perhaps in conjunction with a 529. Parent-owned 529 plans are generally treated more favorably for federal financial aid calculations than assets held in many trusts. Families concerned about financial aid eligibility should review ownership structures before making large contributions.

With trusts, there are no IRS or state limits on the amount that can be contributed, but contributions remain subject to federal gift, estate, and generation skipping transfer tax rules. Gifts at or below the annual exclusion amount face no gift tax. However, as soon as you exceed the annual limit, the excess amount must be reported on a gift tax return and will count against your lifetime exemption. With the passage of the One Big Beautiful Bill Act (OBBBA), the lifetime gift, estate, and generation skipping transfer tax exemption in 2026 has been increased to $15MM per person. For example, if you give $119,000 to one person in 2026, the excess of $100,000 over the annual exclusion would be reported to the IRS and would reduce your lifetime exemption to $14.9 million after this gift.

3. How important is distribution flexibility?

This is the area where 529 plans have improved the most in recent years, and families who set up plans years ago should be aware of these new features.

529 plan distributions must still be used for approved expenses to receive tax-free treatment, and non-qualified distributions are subject to income tax and a 10% penalty on earnings. But the definition of “approved” is considerably broader than it used to be and now covers far more than only college tuition.

• K-12 spending allowance doubled. The annual spending limit rose from $10,000 to $20,000 for elementary, middle, and high school. Beginning with 2026 distributions, this applies to public, private, and religious schools, and qualified K-12 expenses now reach well beyond tuition including curriculum materials and textbooks, qualifying tutoring by someone outside the family, standardized and AP test fees, dual-enrollment courses, and educational therapies for students with disabilities from a licensed or accredited provider. This turns a 529 plan into an option that can help your family for years before a college application is ever filed.

It also changes the funding math: a plan being drawn down at $20,000 a year starting in kindergarten needs a vastly different contribution schedule than one untouched until freshman year. A grandparent contributing to a 529 plan for a five-year-old should coordinate contribution efforts with family members.

A word of caution: these are federal changes, and not every state has followed. California, for example, still does not permit 529 funds to be used for K-12 expenses. Confirm your own state’s treatment before taking a distribution, particularly if you claim a state deduction for a contribution — some states will recapture it.

• Career credentials. While 529s had been used for graduate school expenses in the past, they can now be used for recognized postsecondary credentialing — licensing, certification, apprenticeship, and trade programs, along with required continuing education. This is a meaningful answer for the parent who hesitates to fund a 529 because a particular child may not attend college.
• Student loans. Consider how much of the cost of college you expect your child or grandchild to finance through borrowing. Up to $10,000 from a 529 plan can go toward student loan repayment over the beneficiary’s lifetime, and contributions made during college can reduce the amount of debt they face after graduation.

When it comes to distributions, trusts offer greater flexibility. When structured appropriately, a trust allows you to distribute assets for a broader range of reasons than solely educational expenses, such as Health, Maintenance and Support, so long as they benefit that individual beneficiary. If you are funding private school tuition greater than the $20,000 annual 529 plan limit, you might consider a trust for additional flexibility.

4. How do you want to set your kids up for post-college life?

When setting up college funding plans, the post-graduation picture should not be ignored. While excess funds in a 529 plan can be used to pay for graduate school, the 529 has a new and genuinely useful exit ramp: the Roth IRA rollover.

Unused 529 money can be used to supplement a child’s retirement savings, and over their lifetime, up to $35,000 can be rolled into a Roth IRA for the same beneficiary. This provision partially addresses one of the most common concerns around 529 plans: what if we don’t use all the funds? However, the conditions on this transfer are strict and worth knowing:

• The 529 account must have been open at least 15 years. 
• Each year’s rollover is capped at that year’s Roth contribution limit — $7,500 in 2026 — reduced by any other IRA contributions the beneficiary makes that year. Therefore, reaching the lifetime $35,000 limit can take several years. 
• The beneficiary must have earned income at least equal to the amount rolled over. 
• Contributions made within the last five years, and their earnings, are not eligible to be rolled over.

Alternatively, what if the child does not go to college at all? A 529 plan owner could change the beneficiary to eligible family members that might utilize it.

Despite the newly expanded capabilities of 529 plans, a trust still offers the most options for post-college life, because it can be set up to support the costs young adults face when leaving school. They could use those funds to rent their first apartment, where three or four months’ rent is often required, or to furnish it. Or the money could simply be a nest egg for emergencies, giving you peace of mind as they take those first brave steps into the working world. Later in life, funds in a trust might prove valuable for a child to start a business, pay for a wedding, or use as a down payment for a home.

5. How important are estate planning and control considerations?

Both 529 plans and Irrevocable Trusts can offer estate tax relief, however, a properly drafted trust provides far more control over how and when beneficiaries access assets. Contributions to a 529 plan are typically removed from the contributor's taxable estate while the account owner retains control over the account. This unique combination of estate reduction and ongoing control is one reason 529 plans are popular with many affluent grandparents and parents who seek to move assets to younger generations.

For many families, the primary advantage of a trust has less to do with education funding and more to do with control. Besides funding education, a trust can be drafted to reflect your family's values, concerns, and long-term objectives. Unlike a 529 plan, a trust can specify not only how assets are invested, but also when and under what circumstances they are distributed. For example, distributions might occur at certain ages, or for specific purposes such as education, a home purchase, or starting a business.

Trusts also provide certain protections that a 529 plan cannot. A trust can help shield assets from creditors, provide safeguards in the event of a divorce, and allow a trustee to limit distributions if substance-abuse or other concerns arise. These restrictions can also help prevent a beneficiary from receiving a significant sum before they have developed the maturity and financial experience to manage it responsibly. They can also be particularly effective in blended-family situations, by clearly defining how assets should pass among children from different marriages, stepchildren, or future generations, reducing the potential for disputes and ensuring that your wishes are carried out as intended.

Finally, a trust allows you to appoint a professional trustee to manage investments and make objective distribution decisions long after the trust grantor is gone. For families who prioritize control, protection, and multigenerational planning, a trust may be a valuable complement to a 529 plan rather than a substitute for one.

6. How does this fit into your broader plans?

Financial planning for a child’s future should not exist in a vacuum. It belongs inside your broader investment and savings plan, so you can grow wealth for your own future while still supporting your children or grandchildren. Before deciding how much to put aside for college, make sure your emergency reserves, retirement, and longterm planning objectives remain on track. That means having a thorough understanding of your cash flow, taxes, and investments before funding vehicles that benefit your family, whether it is education specific or for broader needs.

With two vehicles in play, the question we hear most often is: Which one should I pick? A better question is: In which order should these options be funded?

• Fund education with a 529 first. For dollars likely to be spent on education, a 529 wins on nearly every measure: no federal contribution cap (though state limitations may apply), tax-deferred growth, tax-free withdrawals for qualified expenses, $20,000 a year available for K-12, credentialing coverage, a possible state tax deduction for contributions, the ability to change beneficiaries, and a Roth rollover if money remains.
• Use a trust when control and non-cash assets are a priority. Trusts can hold a much wider variety of assets, accommodate substantial sums, and provide control on when and how funds are used. Trusts are particularly valuable when giving a beneficiary unrestricted access to large sums of money is not the outcome you want.
• Revisit the strategy as your child approaches adulthood. Regular communication with your child as they grow can help determine the best approach for education funding. The year your child turns 18 is an ideal time to reassess your plan and determine whether saved assets are still intended for education, should be converted to jump start retirement, or would be better used for another goal.

In Conclusion

Key takeaway: Education remains one of the largest expenses families may face. The best approach is to understand the features and benefits of different strategies so you can determine the best options for your family. This can mean using a 529 plan, a trust, or both. The 529 plan has quietly become the most useful account for education funding, providing remarkable flexibility and now serves a child from kindergarten through their first retirement contribution. Trusts offer a different array of benefits: control, protection, estate planning versatility, and the ability to hold a broad range of assets.

With proper planning, done well in advance of the college years, it is possible to seamlessly transition from financially supporting children to focusing attention on all the other financial priorities in your life. Remember, scholarships, grants, and student loans exist, but retirement loans do not. Used together, 529 plans and trusts can help support a child's future without losing sight of your own.

529 Plan vs. Trust - At a Glance

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