Why Overfunding a 529 Can Be a Mistake & How UTMAs Can Add Estate Planning Flexibility

529 plans are one of the most popular tools for education savings, offering tax-deferred growth and tax-free withdrawals for qualified education expenses. While these benefits are meaningful, overfunding a 529 plan can create unintended limitations, especially for families focused on long-term wealth and estate planning.

Understanding where 529 plans fall short and how UTMA accounts can complement them can help families build a more flexible and resilient strategy.

The Risk of Putting Too Much Money in a 529 Plan

529 plans are purpose-driven accounts, and that narrow focus is both their strength and their weakness.

Key considerations include:

• Restricted use of funds: Assets are intended primarily for qualified education expenses. Non-qualified withdrawals may trigger taxes and penalties on earnings.

• Uncertain education outcomes: Not all beneficiaries attend college, attend costly programs, or follow traditional education paths.

• Planning rigidity: Excess 529 assets are less adaptable for goals such as entrepreneurship, housing support, or early-career needs.

• Financial aid impact: Depending on ownership, 529 assets may affect need-based financial aid calculations.

The New 529-to-Roth IRA Rollover Rule

Recent rule changes added flexibility:
Up to $35,000 of unused 529 assets can be rolled over into a Roth IRA for the beneficiary, subject to several conditions:

• The 529 must have been open for at least 15 years

• Rollovers are subject to annual Roth IRA contribution limits

• Contributions made within the last five years are ineligible

• The Roth IRA must be in the beneficiary’s name

While this rule helps reduce the risk of overfunding, it does not fully eliminate the structural limitations of 529 plans, particularly for larger balances.

Why UTMA Accounts Can Be Powerful for Estate Planning

A Uniform Transfers to Minors Act (UTMA) account allows assets to be gifted to a minor and managed by a custodian until the child reaches the age of majority.

Unlike 529 plans, UTMA assets are not restricted to education.

Key Advantages of UTMAs

• Broad flexibility: Funds can be used for any expense that benefits the child, not just education.

• Estate planning benefits: Contributions are generally considered completed gifts, potentially reducing the donor’s taxable estate.

• Investment flexibility: UTMAs can hold a wide range of investments, allowing for customized long-term strategies.

• Tax considerations: Income may be taxed at the child’s rate, subject to kiddie tax rules.

The primary trade-off is that control transfers fully to the beneficiary at the age of majority, making thoughtful funding levels and family education essential.

A Balanced Planning Approach

For many families, the most effective strategy is not choosing between a 529 and a UTMA, but using both intentionally:

• 529 plans can fund a realistic portion of anticipated education costs, with the Roth rollover providing a modest backstop.

• UTMA accounts can support broader wealth-transfer, estate planning, and life-opportunity goals beyond education.

This approach avoids overconcentration in a single, restrictive vehicle while maintaining flexibility as a child’s future path evolves.