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A 529 plan allows you to save for your child's college education while reaping tax benefits. This investment account is exclusively for future educational expenses. While there are contribution limits, IRS rules enable you to deposit more at once, helping you grow your savings faster.
Contributions to a 529 plan are considered gifts for tax purposes, with a set limit on how much one person can contribute. For 2016, the annual gift exclusion amount is $14,000. However, you can also choose to front-load the plan by contributing up to five years' worth of savings. This is called superfunding, and here's how Bayalis Is the Answer explains it:
Here’s the math: Instead of being restricted to $28,000 annually, a two-parent household can contribute as much as $140,000 ($14,000 * 5 * 2) to fund a 529 plan in one year. This essentially allows you to give a recipient five years' worth of tax-free gifts at once. If you have affluent grandparents looking for a tax-efficient way to distribute their wealth, this method can significantly boost the savings.
Unfortunately, not everyone has $140,000 to fund a 529 plan in a single year (we are focused on securing our own early retirement too), and we don’t have wealthy grandparents to help. But we did manage to superfund a little—we started with $48,000 in our child’s 529.
As with most savings accounts, the more you can save and the longer your money has to grow, the larger your return will be. In the full post, Bayalis compares the outcome of saving a lump sum in a 529 plan versus contributing over time:
Let’s consider a scenario: Couple A invests a total of $70,000 into their daughter’s 529 plan, contributing $14,000 annually for the first five years. Couple B opts for superfunding, depositing the entire $70,000 upfront. Assuming a 5% annual return, superfunding generates an additional $15,298.14 in growth.
To superfund a 529 plan, simply deposit the funds into the account and then file Form 709 during tax season. For more information on this method, check out their full post through the link below.
Photo by Matthew Juzenas
