Why superfund a 529 plan?
Key takeaways
Reduce taxable estate
Money in a 529 plan is a completed gift and is the beneficiary’s assets, not the account owner’s.
Take advantage of compounding
A large contribution allows for compounded growth, especially one made when the child is born and has 18 years to grow.
Control the money
Clients manage the plan — choose the plan, pick the investments, manage withdrawals, and can change the beneficiary too.
“Superfunding” a 529 college savings plan can be good for both your client — and the beneficiary of the plan. This accelerated gifting, making five years of contributions in one year, offers several potential benefits for your clients. Plus, a child gets the gift of an education.
Reduce taxable estate
For clients looking to reduce their taxable estates, utilizing superfunding may make sense. 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 owner’s.1
The annual gift amount is $17,000 in 2023, so an individual can choose to superfund and contribute $85,000 to a 529 plan in one year; a married couple $170,000. Any additional contributions to the 529 plan before five years have passed would count against their lifetime gift tax exemption. After the five-year period, the client can make another five-year gift contribution.
A client can superfund as many 529 college savings plans as they want. It doesn’t have to be for a family member. It can be for anyone they choose, even an adult who wants to further their education. For example, a married couple with six grandchildren could reduce their estate by more than $1 million by contributing the $170,000 maximum for each.
Get a state tax deduction
Thirty-five states and the District of Columbia currently offer a state income tax deduction or tax credit for 529 plan contributions. In some states, only contributions to the state’s 529 plan can be deducted. For others, contributions to any 529 plan can be deducted. (Contributions to 529 plans are not federally tax deductible.) When superfunding, the client only gets the state deduction for that year in most states. See 529 tax benefits by state.
Utilize tax-free compounding
Talk to clients about the potential compounding benefits of a large one-time gift to a 529 plan — particularly if it’s made when the child is born and has 18 years to grow. For example, John used accelerated gifting to contribute the maximum allowable five-year gift of $85,000 to a 529 plan for his grandson. After 18 years and assuming a 5% annual rate of return, it could grow to more than $204,563. He also reduced his estate by $85,000. His wife also makes an $85,000 one-time gift, the $170,000 could grow to more than $409,125 and reduce their estate by another $85,000 too.2
Control the money
Of course, a client can just gift the same amount of money to a child versus putting it in a 529 plan. But they may not be comfortable giving the money directly to the child and allowing them to use it as they want. With a 529 plan, they choose the plan, pick the investments, and manage withdrawals. They can even change the beneficiary of the account if the child decides not to go to college.
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 $17,000 and $85,000 ($34,000 and $170,000 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 $85,000 maximum ($170,000 for married couples filing jointly), additional contributions may be made without subjecting the donor to federal gift tax, up to a prorated level of $17,000 ($34,000 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 $17,000 and $85,000 ($34,000 and $170,000 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 example from Invesco, January 2023, This hypothetical illustration assumes an initial investment and a second investment up to the maximum before gift tax penalties apply and a 5% annual 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.
