Superfunding a 529 College Savings Plan
At ShankerValleau, we frequently advise entire families; supporting each generation as they plan for the next. Wishes for the next generation may include jump starting a grandchild’s college savings or giving a meaningful gift to a cherished family member. But sometimes, an individual’s wish to gift to the younger generation is constricted by gift tax laws. While there are various tools available for making significant, tax efficient gifts, let’s focus on 529 college savings plans and the act of “Superfunding”.
What is Superfunding?
In 2021, the federal gift tax exclusion is $15,000. A person may give away up to $15,000 each to as many individuals as they wish, without those gifts counting against their lifetime exemption. However, superfunding allows a contributor to make up to 5 years’ worth of contributions at one time to a 529 college savings plan, while still qualifying for the annual gift tax exclusion. In other words, a single person may contribute up to $75,000 to an individual’s 529 plan, or a married couple may contribute up to $150,000, all at once. And this is for EACH beneficiary! For example, if an individual has three grandchildren, they may superfund all three 529 college savings plans in the same year.
Why is Superfunding Great?
Superfunding is a quick way to contribute significant funds to a 529 plan that will grow tax free until withdrawn for qualified education expenses. The power of compound interest means that a dollar invested today may be worth a lot more than a dollar invested 5 years from now. A superfunded gift has the potential to grow a young person’s 529 plan at a much faster rate than the same gift spread over 5 years. In this scenario, everyone wins. The younger generation receives meaningful college funding, while the more senior generation quickly and easily removes assets from their estate, potentially lowering their future heirs’ tax bill by thousands.
Is Superfunding Right for You?
As with most financial tools, there are additional items to consider if superfunding is elected. The transaction requires proper tax reporting of the individual who makes the gift. In addition, superfunding may preclude the giver from making additional gifts to the beneficiary for the next 5 years. Finally, state tax benefits should be weighed, depending on the state of residency.
This is where a seasoned financial planner can step in to advise if superfunding is the right tool for your financial situation and goals. At ShankerValleau, we can help you determine the appropriate tools for sharing your wealth, and put them into action for you. If you are looking for a way to support the next generation in your family, and the generations that follow, education funding may be an excellent first step.