“Superfund” a 529 College Plan for Even More Compound Interest Savings

With a 529 plan, you can save for your kids’ college and score tax benefits in the process. It is basically an investment account that you can only use for future tuition. Although there are limits to how much you can save, an IRS rule allows you to save even more at a time so you can earn more over time.

Any money saved in a 529 plan is considered a gift for tax purposes. This means that there are limits to the amount a person can contribute and for 2016 the annual donation exclusion amount is $14,000. But you can also pre-fund a 529 plan with up to five years of savings. It’s called superfunding and this is how financial site Bayalis is the answer explains it:

Let’s do the numbers. Instead of being limited to $28,000 per year, a two-parent family can go up to $140,000 ($14,000 * 5 * 2) to fund a 529 in a single year. Basically, you are allowed to give a single recipient five years of tax-free gifts in a single year. If you have wealthy grandparents who want a tax-efficient way to part with part of their estate, you can accumulate even more.

We don’t have access to $140,000 to save for a 529 in a single year (we also selfishly fund our own early retirements), nor do we have access to wealthy grandparents. We have, however, overfunded a bit. We started her with $48,000 in her 529.

Like most savings accounts, the more money you have to save, the more more time for that money to grow, the more important your return will be. In fact, in the full message, Bayalis shows the difference between saving a lump sum in the 529 and spreading the savings over time:

Suppose Couple A invests a total of $70,000 in their daughter’s 529, but does so at the rate of $14,000 per year for the first five years of her life. Couple B decides to superfinance and invests the entire $70,000 at the start. If we assume a 5% annual rate of return… The superfund brought in an additional $15,298.14.

To superfund a 529, you would just need to add the money in the account, then deposit Form 709 at tax time. To learn more about this method, head over to their full article at the link below.


picture by Matthew Juzenas

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