tax planning Archives

How Grandparents Can Help Fund Their Grandchildren’s Education with a 529 Plan

Andrew Lemay on July 6, 2026

Discover how 529 plans can help support future education costs through tax-advantaged savings, strategic gifting, and long-term planning.

In my first month at Note Advisors, I’ve noticed a wonderful trend: many grandparents are incredibly eager to make a lasting impact on their grandchildren’s education.

Recently, someone asked whether they could contribute appreciated stock directly to a grandchild’s 529 plan to bypass capital gains taxes.

While the short answer is no, it highlights a great opportunity to break down how 529 plans work and how to navigate this exact scenario.

What Is a 529 Plan?

Authorized by Section 529 of the Internal Revenue Code, 529 plans are tax-advantaged savings accounts designed to encourage saving for future education costs. Here are some key benefits of opening one:

Tax Benefits

Contributions are made with after-tax dollars.
Earnings grow 100% tax-free.
Withdrawals are tax-free when used for Qualified Higher Education Expenses.

Diverse Educational Pathways

Traditional 2- and 4-year public and private colleges and universities
Graduate programs
Technical and trade schools
Registered apprenticeship programs

No Income or Age Restrictions
The beneficiary must be a U.S. citizen or resident alien with a valid Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN).

Contribution Rules

By law, all 529 contributions must be made in cash or cash equivalents, such as checks, electronic transfers, or payroll deductions. While you cannot transfer stock directly into a 529 plan, there are ways to maximize contributions.

Maximizing Contributions: It’s Per Giver, Not Per Plan

There is no limit on how many different people can contribute to a single child’s plan. The 2026 rules apply to each individual donor:

Annual Exclusion

Each individual can contribute up to $19,000 per year (or $38,000 for married couples filing jointly) per beneficiary without triggering gift tax reporting.

Superfunding

An individual can front-load five years of gifts at once—up to $95,000 individually or $190,000 jointly—provided no further gifts are made by that specific donor to that beneficiary for five years.

Lifetime Plan Caps

Contribution limits vary by state. For example, New York caps the maximum aggregate balance per beneficiary at $520,000.
Once the cap is reached, no new contributions are allowed from any source, although the account may continue growing through investment returns.

Solving the Appreciated Stock Dilemma

Since you cannot transfer appreciated stock directly into a 529 plan, you have two primary pathways to consider, each with its own tax trade-offs.

Strategy 1: Liquidate and Gift

You can sell the stock, pay any applicable capital gains tax, and contribute the cash proceeds to the 529 plan.

While this approach may create an immediate tax liability, it is often the simplest and most straightforward option. Once the cash is contributed, future growth inside the 529 plan can compound tax-free, and qualified withdrawals for education expenses can also be taken tax-free.

Optimization Strategy: If the stock has appreciated, you may be able to reduce the tax impact by harvesting capital losses elsewhere in your portfolio to offset some or all of the gains recognized on the sale. In certain situations, it may also make sense to spread stock sales over multiple tax years to help manage the overall tax burden.

Although paying capital gains taxes upfront may seem undesirable, it can be worthwhile when weighed against the long-term tax benefits and flexibility that a 529 plan provides.

Strategy 2: Gift Stock Through a Custodial Account

You can gift the stock to a custodial account in your grandchild’s name. Your grandchild assumes your original cost basis, and the stock can later be sold to help fund the 529 plan.

However, there is an important tax consideration.

Many families assume that because the stock now belongs to the grandchild, any capital gains will automatically be taxed at the grandchild’s lower tax rate. In some cases, that is true. However, the IRS has established “Kiddie Tax” rules to prevent families from shifting investment income to children solely to take advantage of lower tax brackets.

As a result, if your grandchild is under age 18 (or under age 24 and a full-time student) and realizes more than $2,700 of unearned income, such as dividends, interest, or capital gains, a portion of that income may be taxed at their parents’ higher marginal tax rate instead of the child’s rate.

There is an important exception for grandchildren who are 18 or are full-time students between the ages of 19 and 23. If they file their own tax return and provide more than 50% of their own financial support specifically through their own earned income, such as wages or self-employment income, they may avoid the Kiddie Tax and instead use their own individual tax rate, which can be as low as 0% for long-term capital gains.

If they do not meet this earned-income support test, you may need to wait until the Kiddie Tax rules no longer apply—generally age 19 for non-students or age 24 for full-time students—before selling the stock.

What Counts as a Qualified Withdrawal?

Funds can be used at qualified colleges, universities, graduate schools, technical and trade schools, and registered apprenticeship programs.

Higher Education & Trade Schools

Qualified expenses include:

Tuition
Mandatory fees
Books
Supplies
Equipment
Computers and internet access used by the beneficiary for educational purposes

Room & Board

Room and board expenses qualify only if the student is enrolled at least half-time and are generally capped at the school’s published cost-of-attendance figures.

Apprenticeships

Qualified expenses include fees, textbooks, and equipment required for participation in a U.S. Department of Labor registered apprenticeship program.

K-12 Tuition

At the federal level, up to $20,000 per year per beneficiary may be used for elementary or secondary public, private, or religious school tuition.

However, New York State treats K-12 tuition withdrawals as nonqualified distributions for New York State tax purposes.

Student Loans

Up to a $10,000 lifetime maximum per beneficiary may be used to repay qualified student loans.

Understanding Adjusted Qualified Education Expenses (AQEE)

Adjusted Qualified Education Expenses (AQEE) are calculated as total qualified education expenses minus any tax-free educational assistance received.

You can only take tax-free withdrawals up to the final AQEE amount. Any withdrawal exceeding AQEE is considered nonqualified, and the earnings portion of the withdrawal is subject to ordinary income tax plus a 10% penalty.

New York State Tax Deduction

Contributions to a New York State 529 plan may help lower your tax bill.

New York taxpayers may deduct:

Up to $5,000 for individual filers
Up to $10,000 for married couples filing jointly

Certain limitations may apply depending on each individual’s situation.

Leftover Funds & “What-If” Scenarios

If a beneficiary receives a full scholarship, chooses not to attend college or trade school, or simply has money remaining in the account, the funds are not lost.

Scholarship Exception

You may withdraw an amount equal to the scholarship penalty-free. However, ordinary income tax will still apply to the earnings portion of the withdrawal.

Beneficiary Change

You can change the beneficiary to another qualifying family member, including children, siblings, cousins, spouses, and others.

Maintain the Account

If the beneficiary plans to pursue future education, the funds can remain invested and available for future qualified expenses.

Roth IRA Rollover

If the 529 account has been open for at least 15 years, leftover funds may be rolled directly into the beneficiary’s Roth IRA.

This strategy is subject to:

A $35,000 lifetime rollover limit
Annual Roth IRA contribution limits ($7,500 for 2026, or $8,600 if the beneficiary is age 50 or older)

Take a Nonqualified Withdrawal

You may withdraw funds for nonqualified purposes, but the earnings portion may be subject to:

Federal and state income taxes
A 10% penalty tax

The original after-tax contributions are treated as a return of capital and are generally not taxable.

Key Takeaways

The Ultimate College Safety Net

529 plans are one of the most effective tools for building a dedicated education fund and helping students graduate without the burden of significant student loan debt.

The Triple-Tax Advantage

Tax-Deferred Growth

Investments compound tax-free while inside the account.

Tax-Free Withdrawals

Qualified withdrawals are free from federal income tax and, in most cases, state income tax.

State Tax Benefits

Many states offer an upfront state income tax deduction or tax credit for contributions.

Significant Flexibility

If the original beneficiary decides not to pursue higher education, you are not locked into one outcome. The beneficiary can be changed to another qualifying family member without triggering taxes or penalties.

No More “Use-It-or-Lose-It” Concerns

Recent tax law changes allow a lifetime limit of up to $35,000 of unused 529 assets to be rolled into a Roth IRA for the beneficiary, potentially giving them a meaningful head start on retirement savings.

If you have questions or need help setting up a 529, don’t hesitate to reach out by either scheduling a call using the button below or emailing us directly at connect@noteadvisor.com.

Schedule a Call

Andrew Lemay, CPA, MBA, is a Tax & Financial Planning Associate at Note Advisors. He works closely with the firm’s CERTIFIED FINANCIAL PLANNER® professionals to help clients align tax strategy, preparation, and compliance with their broader financial goals. As he works toward earning his CFP® certification, Andrew is committed to delivering the integrated planning experience that is central to Note Advisors’ approach. Connect with him on LinkedIn.

No portion of this commentary is to be construed as the provision of personalized investment, tax or legal advice. Please consult with the appropriate professionals for advice that is specific to your situation. Note Advisors, LLC can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.

What Parents Should Know About the New Section 530A “Trump Accounts”

Andrew Lemay on June 1, 2026

Insights From a Recent Kitces Webinar

I recently attended an informative webinar through Kitces.com covering the newly introduced Section 530A “Trump Accounts,” and I wanted to share some key insights because there have already been a lot of questions surrounding who can open these accounts, how they work, and whether they may create planning opportunities for families.

Authorized under the One Big Beautiful Bill Act (OBBBA), Section 530A accounts introduce a brand new tax-advantaged investment vehicle for minors. At their core, they function like an early start retirement account, designed to give children the opportunity to benefit from decades of tax-deferred compounding growth.

While the legislation is still very new and additional guidance will likely continue to emerge, there are several important takeaways worth understanding now.

Who is Eligible and How to Open an Account?

Any U.S. citizen under the age of 18 with a valid Social Security number is eligible for a Section 530A account.

A parent and/or legal guardian, adult sibling, or grandparent, in that order of priority, can establish the account beginning July 4, 2026, through either:

The official government portal at trumpaccounts.gov
IRS Form 4547, filed concurrently with your federal income tax return.

Understanding the Growth Period

From the time the account is opened until the end of the year before the child turns 18, the account enters what’s called the “Growth Period.”

During this phase:

Assets grow tax-deferred
Distributions are generally prohibited
Investments are limited to broad U.S. equity index mutual funds or ETFs with expense ratios capped at 0.1% annually.

The goal appears to be keeping these accounts relatively simple, low cost, and focused on long-term growth.

The 4 Ways These Accounts Can Be Funded

One of the more interesting aspects of the legislation is the flexibility around contributions.

1. Direct After-Tax Contributions

Parents, grandparents, family members, friends, or even the child themselves can contribute cash directly to the account.

Annual contribution limit: $5,000
Contributions are after tax
No tax deduction is received

2. Employer Contributions

Employers can voluntarily contribute up to $2,500 annually to either:

An employee’s account, or
Their dependent’s account

These contributions are excluded from the employee’s gross income under Section 128, though they still count toward the $5,000 annual limit.

3. The $1,000 Federal Pilot Program

One of the most discussed provisions is the government-funded pilot program contribution.

Children born between January 1, 2025 and December 31, 2028 qualify for a one-time $1,000 contribution funded directly by the U.S. Treasury.

Importantly:

This does not count toward the $5,000 annual contribution limit
Families must actively elect the contribution through Form 4547 or the online portal

For young families, this may represent a meaningful opportunity to begin investing early.

4. Qualified General Contributions

Approved charitable or government organizations can inject large-scale capital aimed at broad geographic or age-based classes of beneficiaries.

These do not count toward the $5,000 annual contribution limit

The Power of Starting Early

Even relatively small amounts invested early can potentially become substantial over time because of compound growth. Section 530A accounts are uniquely designed to maximize this compounding effect, as these accounts are established for minors and the initial investments have nearly two decades to grow.

What Happens at Age 18?

Once the beneficiary turns 18, control of the account transfers entirely to them, and the account essentially adopts the rules of a Traditional IRA.

At that point, they generally have four options:

Maintain the Account

Keep the account invested and continue allowing it to grow tax-deferred.

Roll It Into a Traditional IRA

Transfer the balance into a Traditional IRA without penalty and continue deferring taxes until retirement distributions begin.

Convert to a Roth IRA

Potentially one of the more powerful planning opportunities.

The beneficiary can convert the account into a Roth IRA without a 10% penalty, though income taxes would still apply at the time of conversion to the non-basis portion of the account, including:

Employer contributions
Government pilot contributions
Qualified General Contributions
Investment growth

Because many 18-year-olds are often in relatively low tax brackets, this could create an opportunity for lower-cost Roth conversions early in life.

That said, families will want to pay close attention to Kiddie Tax rules, since large conversions could potentially trigger taxation at the parents’ higher marginal tax rates.

Take a Distribution

The beneficiary can also withdraw funds directly.

Original direct after-tax contributions are considered a return of your basis and are tax-free
Growth, employer, charitable, and government contributions are taxable as ordinary income
Withdrawals before age 59½ may also trigger a 10% early withdrawal penalty unless an IRA exception applies

The Biggest Planning Consideration May Not Be Taxes

One of the more interesting discussion points from the webinar had less to do with taxes and more to do with behavior.

At age 18, the beneficiary legally gains control of the account.

For some families, that may prompt an important conversation about financial education and long-term decision-making.

An 18-year-old may understandably feel tempted to cash out funds for short-term wants, especially if they don’t fully understand the long-term value of compounding.

That makes financial literacy and ongoing education incredibly important.

Because ultimately, the real power of these accounts is not necessarily the initial contribution itself. It’s the time horizon attached to it.

We’ll continue monitoring guidance and developments surrounding Section 530A accounts and helping families evaluate how they may fit into a broader long-term financial plan. If you have questions, don’t hesitate to reach out by either scheduling a call using the button below or emailing us directly at connect@noteadvisor.com.

Schedule a Call

5 Myths of Tax Planning

Mario Riccadonna on September 28, 2023

They say all you need to survive is food, shelter, and love.

I think they forgot tax planning.

It doesn’t have the kind of marketing that love gets, but it’s the most unbelievably useful financial practice you might never have heard of.

Picture this: over the past 40 years you have been stockpiling savings into your employer retirement plan. But on your retirement date, it’s worth less than what the statement says. Sound alarming? Well, this would be the case if you haven’t given any thought about tax planning for those 40 years, especially around your retirement.

The IRS is not-so-patiently waiting to take anywhere from 0% to 47% of your pre-tax retirement account. Our goal as tax planner is to reduce your total lifetime tax to get you closer to the 0% than the 47%.

When I first mention tax planning, I often find that people have some pretty profound mistaken beliefs about it. Here are five myths I hear the most:

#1 – Tax planning has to be complex.

Surprised? Don’t be, even though an alarming number of tax planning “experts” insist that the only way to lower your total lifetime tax bill is to implement some ultra-obscure tax strategy. While yes, these strategies may work for a select few, the “experts” often gloss over the “boring” and easy-to-implement strategies.

For example, implementing annual Roth conversions, HSA strategies, or selecting between pre-tax or Roth contributions can potentially reduce your total lifetime tax by tens of thousands of dollars.

There’s an old adage that’s a great frame of mind for your tax planning strategy:

“Small hinges swing big doors.”

Little choices now can make a big difference later.

#2 – The goal of tax planning is to pay zero tax every year.

A year where you pay zero tax is a lost opportunity in the realm of tax planning. When we look at successful tax planning, we want to see a reduction in your total lifetime tax paid.

This means potentially paying more tax one year and less the next. Years with lower income can provide a great opportunity to implement a number of tax strategies (capital gain recognition, Roth conversions, etc.)

The professional handling your tax planning should be computing tax projections each year to determine what strategies are best to implement. As we like to say at Note, “pay the IRS every dollar you owe, but don’t leave them a tip.”

If your wallet’s feeling too heavy or you’re just feeling extra patriotic, the U.S. government happily takes donations against the national debt.

#3 – Your accountant does tax planning for you.

I’m sure there are some accountants who do real tax planning, but speaking from experience, the vast majority do not. While having a rockstar accountant in your corner helps, they tend to make better historians than planners.

Your accountant is more like a rearview mirror. They’re useful, but unless you plan on driving in reverse, you’re going to need someone looking down the road with you. Your tax planner is more like a windshield. It’s crucial to look through the windshield and have someone planning out your future tax strategies.

Know what’s even better? If your financial planner and accountant can work together closely to ensure the tax strategies get reported and implemented correctly.

#4 – The benefits of tax planning can be seen quickly.

Tax planning (when done right) is more like well-aged bourbon than lemonade. If you have a short-term frame of mind, you might still come out with a good outcome. However, if you keep your sights on the long-term and give it years to mature, you can have an amazing product to enjoy.

There are almost always strategies to implement now to see a payoff in the short term, like safe harbor payments to avoid an underpayment penalty. But most strategies need time to mature.

For example, if we decide to do a six-figure Roth conversion, it might take decades to benefit from that strategy. But the models suggest that a conversion like that could generate seven figures worth of tax savings.

Patience can pay off.

#5 – Tax planning is only for the “rich.”

Ever read a book on tax planning? Probably not! But if you had, it would probably sound like you need to own a yacht or a villa before tax planning is relevant. It’s not true!

Every person who is paying taxes can and should implement some sort of tax planning strategy.

There are strategies to utilize no matter your income or net worth. It all comes down to being intentional with your personal finances. As we’ve seen with our clients, what you give your attention to makes all the difference.

Whether that’s making the intentional choice to save in pre-tax dollars, or after-tax dollars, or both. Knowing how different retirement accounts work is tax planning. Deciding which ones are best for you and your goals is tax planning!

If you want to be intentional with your tax planning and/or your personal finances and don’t know where to start, I’d urge you to seek the help of a tax planning professional.

It’s never “one and done”.

Tax planning is not just a one-time thing. You should have eyes on your tax return and tax planning strategies each and every year.

Here’s three easy steps to get you started:

Review your prior year tax return. It’s important to understand your income and how it affects your total tax. Take note of your total income, taxable income, total tax paid, and marginal tax rate.
Understand your eligibility to contribute to pretax, Roth, and After-tax retirement accounts. Be intentional with how you will fund each.
If all of this seems overwhelming, I urge you to reach out to your financial advisor.

If tax planning isn’t in your advisor’s arsenal, we should talk. Schedule a 15-minute consultation to see how we can help.

Schedule a call with me