Selling my business with significant capital gains - should I max out 529 plans for my 4 kids to reduce taxes?

You're approaching this the right way by thinking about tax optimization, but there are some important limitations to consider with 529 plans. First, contributions to 529 plans are not deductible for federal income tax purposes, so they won't directly reduce your federal capital gains tax. However, many states do offer state income tax deductions for 529 contributions, with varying limits. For a large lump sum like you're considering, look into "superfunding" - you can contribute 5 years' worth of gift tax exclusion at once ($85,000 per beneficiary based on the current $17,000 annual gift tax exclusion). This allows you to front-load the accounts without triggering gift taxes. For your oldest who's graduating, it probably doesn't make sense to contribute much if anything. For the sophomore, consider their remaining education costs. Your younger two will benefit the most from the tax-free growth. Remember that 529 funds must be used for qualified education expenses, or you'll face taxes and penalties on earnings when withdrawn for non-qualified purposes.

When I was selling my consulting business last year, I was in a similar situation with 3 kids and was stressing about college costs. I found this AI tool that analyzes tax documents and financial plans called taxr.ai that really helped me understand my options with 529 plans and optimize my tax strategy for the windfall. I uploaded my tax returns and some financial projections, and it helped me understand exactly how much I could contribute to each kid's plan, when to make the contributions, and how it would affect my overall tax picture. They have specific expertise on business sale scenarios and capital gains strategies. Saved me hours of research and probably thousands in taxes. Worth checking out at https://taxr.ai since your situation has a lot of moving parts with the business sale, equity rollover, and four different college timelines.

Just wanted to follow up - I tried taxr.ai after seeing this thread and it was seriously helpful for my situation (selling my dental practice). It gave me a detailed analysis of how 529 contributions would affect my state taxes specifically (I'm in NY) and recommended spreading contributions over 2 years rather than doing the 5-year superfunding based on my expected income. It also identified some business sale structuring options my accountant hadn't considered that could save me about $32k in taxes. The report was detailed enough that I could take specific questions to my CPA rather than paying him to figure everything out from scratch. My situation wasn't identical to yours but had similar components with the business sale and college-age kids. Definitely worth the investment.

I went through a similar situation when I sold my manufacturing business in 2023. After multiple failed attempts trying to reach the IRS with questions about business sale tax implications (waited on hold for HOURS), I found this service called Claimyr that actually got me through to a real IRS agent in about 20 minutes. I had specific questions about how the 529 contributions would affect my overall tax situation with the business sale, and needed clarification directly from the IRS. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c It really helped me understand exactly what documentation I needed for the large 529 contributions in relation to the business sale. Check them out at https://claimyr.com if you need to speak with the IRS directly. They basically hold your place in the phone queue so you don't have to wait on hold for hours.

I have to admit I was completely wrong about Claimyr. After posting that skeptical comment, I decided to try it since I've been trying to resolve an issue with my business sale capital gains calculation for weeks. The service actually worked exactly as described - they called the IRS, waited on hold (about 45 minutes in my case), and then called me once they had an agent on the line. The IRS agent was able to answer my specific questions about reporting my business sale proceeds and how it affected my overall tax strategy including education funding options. Saved me hours of frustration and potentially thousands in tax penalties from incorrect filing. Sometimes it's worth admitting when you're wrong, and in this case I definitely was.

Have you considered setting up a trust for the college funds instead of using 529 plans? With your level of assets from the business sale, a trust might give you more flexibility, especially for the older kids who are already in college. One disadvantage of 529s is the limited investment options and penalties if funds aren't used for qualified education expenses. With a trust, you could potentially accomplish similar goals with more control. I did something similar when I sold my business in 2019 - set up a trust for each kid with specific educational funding provisions. Worked with an estate attorney to structure it properly. The tax advantages aren't identical to 529s, but the flexibility was worth it in my situation.

Something I haven't seen mentioned yet is that you should check if your state has any maximum contribution limits for 529 plans. Most states have aggregate contribution limits between $300k-$500k per beneficiary. Also, think about who should own the 529 accounts. If grandparents own them, the distributions don't count as income to the student on the FAFSA. But if you own them, they're considered parental assets which have less impact on financial aid than student assets.

Given your substantial windfall and complex situation, I'd recommend a multi-pronged approach rather than putting all your tax optimization eggs in the 529 basket. Since 529 contributions don't reduce federal capital gains taxes (as mentioned earlier), consider these additional strategies: 1. **Installment sale structure** - If possible, restructure part of the business sale as an installment sale to spread the capital gains over multiple years, potentially keeping you in lower tax brackets. 2. **Charitable remainder trust** - If you're charitably inclined, this could provide immediate tax deductions while generating income for retirement. 3. **Opportunity Zone investments** - Depending on timing, rolling some gains into Opportunity Zone funds could defer and potentially reduce capital gains taxes. 4. **State tax planning** - Some states have no capital gains tax. Depending on your residency situation around the sale, this could be significant. For the 529s specifically, I'd suggest contributing enough to maximize any state tax deductions you're eligible for, but don't over-contribute given your kids' ages and remaining education costs. Your sophomore and younger two would benefit most from the tax-free growth. With 20 years until retirement and another liquidity event expected in 4-6 years, you have flexibility to optimize across multiple tax years rather than trying to minimize everything in this single year.