Supercharge your college savings with 529 plan superfunding

To get a jump start on college savings, you might want to consider superfunding a 529 plan. This strategy, also known as "front-loading," helps take full advantage of the power of compound interest, helping your savings grow as long as possible before your beneficiary needs the money for education. It's also a strategy your immediate and extended family can use for tax savings and wealth transfer.

Of course, before starting any investment, you should speak to your tax and investment advisors for guidance. To have a productive conversation, here's what you need to know about this often-overlooked college savings strategy.

What is superfunding?

Superfunding is a way to means for maximizing your college savings. Using this strategy, you would make a lump-sum contribution to a 529 plan up front, instead of making smaller contributions over a series of years.

For example, the recommended annual contribution to a 529 plan is $16,000 per person because that's the current annual gift tax limit set by the IRS in 2022. With superfunding, you can make a single lump-sum contribution of $80,000 in a single year (or up to $160,000 per couple if married and filing jointly) and treat it as if you spread those large contributions out over five years.2

The benefits of superfunding

While you can only superfund a 529 plan every five years, the practice offers several benefits for the right investors:

Compounding

Assuming a modest 8% return on your investments, here are two scenarios that demonstrate the power of superfunding:

A single lump-sum $80,000 contribution compounded at 8% over 18 years would grow to a value of $319,681. If you spread that same $80,000 investment out over 5 years, contributing $16,000 per year (and then contributed no more for the next 14 years), your investment will only reach $292,641 — a $27,040 difference. Depending on the school, that could cover nearly three years of in-state tuition at a public university according to 2020-2021 figures from U.S. News.6

The aggregation loophole

Sometimes superfunding isn't enough to help you reach your college savings goals, especially if you're saving for a child with eyes on a more expensive education like film or medical school. Since 529 plans are state-specific, the maximum contributions vary and your saving efforts stymied if your plan's limit is on the low end like Georgia1 ($235,000 as of 2021).

If you're superfunding the plan every five years, you'll easily max-out the plan's total contribution limits long before the beneficiary turns 18. However, you can continue superfunding if you open an additional 529 plan in another state.

Why out-of-state? Because all contributions to 529 plans with the same beneficiary and account owner in a single state have to be aggregated for purposes of calculating annual contribution limits and tax reporting purposes. This can be a problem if multiple people are contributing to someone's 529. But you can get around the aggregation rules by opening plans in different states. For example, you could superfund a plan in your home state and grandparents or other generous family members could superfund a plan in another state.