Potentially maximize a client’s 529 plan with accelerated gifting and automatic contributions
Key takeaways
Potential Accelerated gifting benefits
Superfund, make five years of gifting in a lump sum to maximize compounding and estate planning.
Easy way to contribute
Make it simple for friends and family — really anyone — to contribute to a child’s education with Ugift®.
Automatic regular contributions
Take advantage of dollar-cost averaging and compounding to give the money time to grow and help maximize savings.
Maximizing a 529 college savings plan is good for clients — and the beneficiary who’ll benefit from one. Two ways to do this are with accelerated gifting and regular, automatic contributions.
1. Potential benefits of accelerated gifting
Accelerated gifting or “superfunding” is a special provision of 529 plans that permits an individual to combine five years of contributions (the current year plus four future years) in a single year. It’s up to $80,000 for an individual (five times the $16,000 annual gifting limit per beneficiary) or $160,000 for married couples filing jointly in 2022. (The annual gift amount is $17,000 in 2023, so an individual can contribute $85,000; a married couple $170,000.) No additional gifts may be made until five years have passed. Clients can do this for as many children as they want. This can be useful if they need to reduce their taxable estate. For estate planning purposes, the Internal Revenue Service considers assets held in a 529 plan as a completed gift and treats them as the beneficiary’s assets, not the account owners.1
A large one-time gift to a 529 plan can benefit from compounded growth, especially if it’s made when the child is born and has 18 years to grow. Consider this example. John used accelerated gifting to contribute the maximum allowable five-year gift of $80,000 to a 529 plan for his grandson. After 18 years and assuming a 5% annual rate of return, it could grow to more than $192,000. He also reduced his estate by $80,000. If his wife also makes an $80,000 one-time gift, the $160,000 could grow to more than $385,000. They reduce their estate by another $80,000 too.2
Not all clients can make such a large gift. Small gifts can make a difference too. Ugift® makes gifting easier. This free service lets family and friends — really anyone — contribute to a child’s 529 plan either electronically or by mail. 529 plan owners receive a unique code for each beneficiary, which they can then share with others who want to contribute.
Make it automatic
If clients want to contribute meaningfully to a child’s education, but can’t make a large one-time gift, regular automatic contributions are another way to help maximize savings. For example, a $200 contribution can grow to more than $76,000 in 18 years.3 The client still gets the benefits of compounding growth. Automatic contributions also utilize dollar-cost averaging, so clients purchase fewer shares when prices are high and more shares when prices are low. Additionally, automatic contributions are a set-it-and-forget-it way to make regular contributions. View the automatic contributions tool to help clients see the potential impact consistent contributions can have for their 529 plan’s growth.
Every contribution — large or small — counts
Every dollar saved today is a dollar plus interest a student or parent may not have to borrow tomorrow. Learn more about how to help your clients contribute to a child’s education on our financial professional resource page.
Footnotes
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1
The gift-tax exclusion applies, provided the 529 account owner makes no other gifts to the beneficiary during a five-year period. Contributions between $16,000 and $80,000 ($32,000 and $160,000 for married couples filing jointly) made in one year may be prorated over a five-year period without subjecting the donor(s) to federal gift tax or reducing his/her federal unified estate and gift tax credit. If an individual contributes less than the $80,000 maximum ($$160,000 for married couples filing jointly), additional contributions may be made without subjecting the donor to federal gift tax, up to a prorated level of $16,000 ($32,000 for married couples filing jointly) per year. Gift taxation may result if a contribution exceeds the available annual gift tax exclusion amount remaining for a given beneficiary in the year of contribution. If the account owner dies before the end of the five-year period, a prorated portion of contributions between $16,000 and $80,000 ($32,000 and $160,000 for married couples filing jointly) made in one year may be included in his or her estate for estate tax purposes. Please consult your tax and/or legal advisor for further guidance.
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2
This chart from Invesco, January 2022, is for illustrative purposes only. This hypothetical illustration assumes an initial investment and a second investment up to the maximum before gift tax penalties apply and a 5% annually compounding rate of return. The illustration does not represent the performance of any specific investment and does not reflect any plan fees or sales charges that may apply. If such fees or sales charges had been taken into account, returns would be lower.
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3
This hypothetical illustration assumes an initial investment and a second investment up to the maximum before gift tax penalties apply and about a 6% annually compounding rate of return. This is a hypothetical example for illustrative purposes only and does not represent the performance of any actual account. https://www.invesco.com/education-savings/en/collegebound-529-advisor/account-access/automatic-529-plan-contributions.html
