I’ve written multiple times about the advantages of using 529 plans to save for post-secondary education. In this post I want to look at a front-loading strategy for 529 plans, both in terms of a practical way to approach this and as a somewhat philosophical way to frame the results.
For this example I’ll use Colorado’s College Invest Direct Portfolio 529 Plan. In Colorado, contributions to this 529 plan are deductible from your state taxes (we have a flat state tax rate of 4.4%), with an annual deduction limit in 2026 of $26,200 per taxpayer, per beneficiary for single filers, or $39,200 per tax filing, per beneficiary for joint tax return filers (with a maximum lifetime contribution of $500,000 per beneficiary). In addition, children born on or after January 1, 2020 can participate in the First Step Program, which contributes $121 immediately and then matches contributions of up to $500 for three years (so a total of $1,621 of “free” money). The plan is managed by Vanguard/Ascensus and has reasonable (although still a bit higher than I would like) fee of 0.28%.
So here’s a basic spreadsheet to illustrate the concept of front-loading your 529 contributions. The first tab illustrates a front-loaded investment of $50,000.
Note that like many posts on this blog, this post assumes a fair amount of privilege. In this case, that you (or perhaps your child(ren)’s grandparents), have the resources to contribute $50,000 up front.
Row 4 shows a contribution of $39,200 (the maximum Colorado state tax deduction in 2026) in December of Year “0”, which in this case means in December of the year the child is born. That contribution also triggers the $121 First Step “gift” and the $500 match for that year. It also results in a Colorado tax savings of $1,725 (4.4% of $39,200), which we’ll assume gets invested back into the 529 when it is received.
Row 5 then shows a contribution of $10,300 in January of Year “1”, which would be just a few weeks after the $39,200 contribution. This also gets a $500 match and results in a tax savings of $453 which will then get invested when received.
Row 6 then shows a contribution of $500 in January of Year “2” in order to get the last of the $500 matching contributions. This results in a tax savings of $22 which will be invested when received.
It then assumes no more contributions in future years, which means they have contributed a total of $50,000. The matching funds from the state and the contributions from tax savings are not included in the $50,000 because they are the direct result of contributing the $50,000 and do not require any additional funds from the parents.
Cell B1 shows the assumed real (meaning after inflation) rate of return. I’m using a real (as opposed to nominal) rate of return so that the final numbers are in today’s dollars so represents actual purchasing power. This is currently set at 6.8%, which is the long-term real rate of return, but you can of course change that to whatever you’d like (choose File–>Make a Copy to get an editable version of the spreadsheet). The current actual cost of college (as opposed to “sticker price”) is a hotly debated topic, and of course varies tremendously based on individual institution, whether it’s a public or private, and the income level of the student. As a result, the all-in yearly cost has a tremendous variation, but is likely somewhere between $20,000 and $50,000 for most students, which would be between $80,000 and $200,000 (in today’s dollars) for four years.
Note that 529 funds can be used for a variety of post-secondary education costs, not just college. But most folks are focused on college so that’s the numbers I’ll reference.
So what the first tab of the spreadsheet indicates is that by Year “19” (the student turns 19 sometime during this year) the account will have a total of $187,515 (again, those are real dollars, the actual total after inflation would likely be higher). That amount compares favorably to the $80,000 to $200,000 expected range of costs (and of course has been tax-deferred and is now tax free for qualified withdrawals).
So that’s the practical aspect, invest $50,000 up front in a 529 plan and have enough money to likely cover four years of higher education. But now come the somewhat philosophical framing that I’d like you to consider. While you have $187,515 (today’s purchasing power) to spend on higher education, 73.34% of that didn’t come from you. Instead, it came mostly from market returns, with a little bit from Colorado tax savings and the matching funds. In other words, “you” are only paying about 27% of these costs. So the market, with a bit of help from the state of Colorado, is paying the vast majority of the costs.
It’s important to note that there are also additional funds that are potentially available to help even more. All of these would lower the percent that “you” are paying even more.
- If a Colorado resident attends college in Colorado, then the Colorado Opportunity Fund provides $116 per credit hour for public institutions in Colorado and $58 per credit hour for private institutions in Colorado. At 15 credit hours a semester, that’s equivalent to $3,480 a year ($13,920 for four years) for public institutions or $1,740 a year ($6,960 for four years) for private.
- Depending on your income, you may be eligible for up to $2,500 a year for four years from the American Opportunity Tax Credit. Note that would mean you had spent $4,000 per year of non-529 funds in order to get this tax credit, you can’t “double-dip”.
- There are also many other scholarships, stipends, and other forms of financial aid that many students can take advantage of.
One of the concerns that people have with using a 529 account is if their child(ren) ends up not needing the funds because they don’t pursue higher education, receive a scholarship, or the 529 accounts ends up with more in it than the total cost of higher education. They are worried about the flexibility of this money, as if you end up withdrawing it for non-qualified expenses you end up not only paying taxes on the earnings but also a 10% penalty on those earnings. This is a legitimate concern, but also one that I think is overemphasized for several reasons. There are a variety of ways to get around this, including the penalty being waived for situations like death, disability, scholarships, or military academy attendance. In addition, you have the ability to transfer the 529 to a different beneficiary, which could be a sibling, a cousin, yourself, or even grandchildren. And there is also a limited opportunity to transfer some of the “leftover” funds to a Roth IRA.
Even if none of these apply, I also think a philosophical re-framing of this situation is helpful. Yes, if you don’t end up being able to use these funds in the way you intended, and if you end up having to pay taxes and the 10% penalty on the earnings, then in retrospect you would have rather invested that money somewhere else. But an alternative, and I think better, way of thinking about this is, “This is money you didn’t think you’d have!” You had anticipated spending this on higher education costs for your child(ren), and now you didn’t. So even after the taxes and the penalty, you still have a bunch more money than you though you would. So instead of lamenting the missed opportunity of investing this money elsewhere, you should think of this as “found money” that you weren’t expecting.
I know not everyone will appreciate that re-framing, so I did create a second tab on the spreadsheet. Instead of investing $50,000 up front, on this tab we invest only $4,200. We still get the First Step “gift” of $121 and the $1,500 in matching funds, and we still get tax savings on the contribution. But the $4,200 amount was chosen because it should be worth approximately $35,000 by year 19. This time that $35,000 is in nominal dollars, not real dollars, so uses an assumed nominal rate of return of 9.8%. This is because the limit on transferring to the beneficiary’s Roth IRA is a total of $35,000 (this is not adjusted for inflation, so that’s why we’re using nominal returns and nominal dollars). For folks who are really worried about “wasting” 529 money if it’s not needed, this front-loading approach has a “safe harbor” that the entire anticipated balance can be transferred to a Roth IRA (over several years) if it’s not used for higher education expenses (and, of course, can still be used for higher education expenses if it is needed). You’ve essentially front-loaded their Roth IRA. (Note that Colorado is one of the states that will “claw back” the state taxes you saved on the contributions if you rollover money to a Roth IRA.)
So if you decide that a 529 is right for you, and if you have the means to front-load your funding, you might consider one of these two approaches (or something in between). While it’s definitely a philosophical way of thinking about it, you can very much frame this as the market (and the government) funding a large portion of your child(ren)’s higher education expense or, at worst, funding a large portion of their “starter Roth IRA” with some “found money” for you if they don’t pursue post-secondary education.
Fisch Financial 