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:
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.
Here's how to save more for a single beneficiary: Open a 529 plan in another state and have different family members superfund each plan.
Estate tax benefits
Superfunding can be a strategy to reduce estate taxes. Consider a grandparent with six grandchildren who's worried about being subject to estate tax when they die. With 529 plan superfunding, they can immediately move $80,000 per child out of their estate into a 529 plan for each of the six grandchildren. This moves $480,000 out of their estate but keeps those funds under their control. In five years' time, they can superfund each of those 529 plans again and further reduce their estate.
As federal estate tax limits are always in flux, it's important to have ongoing conversations as appropriate with your tax advisor and estate planning attorney about how 529 plans can reduce your estate tax liability.
What happens if I overfund a 529 plan?
When you make large, lump-sum contributions to an educational account, it's possible that your intended beneficiary won't need all the funds you've saved. In that case, you have a few options:
- Use the funds for another beneficiary. It's easy to change the beneficiary3 on a 529 plan so the remaining funds can be used by another child or grandchild, or even yourself. Don't forget that up to $10,000 per year4 can be used from a 529 plan for eligible K-12 education, too.
- Withdraw the balance. You can always withdraw the remaining funds. You'll just be subject to a 10% penalty and income tax,5 and then, only on the earnings not principle.
Should you superfund a 529 plan?
Now that you know the benefits of superfunding, you can ask your tax and financial advisors whether this strategy makes sense for your educational savings and wealth transfer goals. While superfunding isn't the right strategy for everyone, it could be a tool to accelerate savings while enjoying some tax breaks along the way.
529 College Savings Plan investments are offered through Synovus Securities, Inc. Information, including fees, expenses and sales charges on the particular plan you have selected, is available in the offering circular or official statement provided by the plan sponsor. Please read the information carefully prior to investing.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- Caitlin See, "Complete List of 529 Contribution Limits for Every State," Student Loan Planner, updated November 1, 2021, accessed December 8, 2021. Back
- FINRA, "Common Features of 529 Plans," accessed December 8, 2021. Back
- IRS, "Publication 970 (2020), Tax Benefits for Education: Qualified Tuition Plans," accessed December 10, 2021. Back
- IRS, "Topic No. 313 Qualified Tuition Programs (QTPs)," accessed December 10, 2021. Back
- Saving for College, "What is the penalty on an unused 529 plan?" Published July 14, 2021, accessed December 10, 2021. Back
- Farran Powell, Emma Kerr, and Sarah Wood, "See the Average CollegeTuition in 2021-2022," published September 13, 2021, accessed December 15, 2021. Back
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