To get a jump start on college savings, you might want to considersuperfunding a 529 plan. This strategy, also known as "front-loading,"helps take full advantage of the power of compound interest, helpingyour savings grow as long as possible before your beneficiary needs themoney for education. It's also a strategy your immediate and extendedfamily can use for tax savings and wealth transfer.
Of course, before starting any investment, you should speak to your taxand investment advisors for guidance. To have a productiveconversation, here's what you need to know about this often-overlookedcollege 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 529plan up front, instead of making smaller contributions over a series ofyears.
For example, the recommended annual contribution to a 529 plan is$16,000 per person because that's the current annual gift tax limit setby the IRS in 2022. With superfunding, you can make a single lump-sumcontribution of $80,000 in a single year (or up to $160,000 per couple ifmarried and filing jointly) and treat it as if you spread those largecontributions out over five years.2
The benefits of superfunding
While you can only superfund a 529 plan every five years, the practiceoffers several benefits for the right investors:
Compounding
Assuming a modest 8% return on your investments, here are twoscenarios that demonstrate the power of superfunding:
A single lump-sum $80,000 contribution compounded at 8% over 18years 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 investmentwill only reach $292,641 — a $27,040 difference. Depending on theschool, that could cover nearly three years of in-state tuition at a publicuniversity according to 2020-2021 figures from U.S. News.6
The aggregation loophole
Sometimes superfunding isn't enough to help you reach your collegesavings goals, especially if you're saving for a child with eyes on a moreexpensive education like film or medical school. Since 529 plans arestate-specific, the maximum contributions vary and your saving effortsstymied if your plan's limit is on the low end like Georgia1 ($235,000 asof 2021).
If you're superfunding the plan every five years, you'll easily max-outthe plan's total contribution limits long before the beneficiary turns 18.However, you can continue superfunding if you open an additional 529plan in another state.
Why out-of-state? Because all contributions to 529 plans with the samebeneficiary and account owner in a single state have to be aggregatedfor purposes of calculating annual contribution limits and tax reportingpurposes. This can be a problem if multiple people are contributing tosomeone's 529. But you can get around the aggregation rules byopening plans in different states. For example, you could superfund aplan in your home state and grandparents or other generous familymembers could superfund a plan in another state.
Here's how to save more for a single beneficiary: Open a 529 plan inanother state and have different family members superfund each plan.
Estate tax benefits
Superfunding can be a strategy to reduce estate taxes. Consider agrandparent with six grandchildren who's worried about being subject toestate tax when they die. With 529 plan superfunding, they canimmediately move $80,000 per child out of their estate into a 529 planfor each of the six grandchildren. This moves $480,000 out of theirestate but keeps those funds under their control. In five years' time,they can superfund each of those 529 plans again and further reducetheir estate.
As federal estate tax limits are always in flux, it's important to haveongoing conversations as appropriate with your tax advisor and estateplanning attorney about how 529 plans can reduce your estate taxliability.
What happens if I overfund a 529 plan?
When you make large, lump-sum contributions to an educationalaccount, it's possible that your intended beneficiary won't need all thefunds 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 taxand financial advisors whether this strategy makes sense for youreducational savings and wealth transfer goals. While superfunding isn'tthe right strategy for everyone, it could be a tool to accelerate savingswhile 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.
