The Benefits of Superfunding a 529 College Education Plan

The Benefits of Superfunding a 529 College Education Plan

December 16, 2021
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If you want your child to go to college, you probably understand the importance of establishing a college fund for them. It’s not that hard to do, and with current gift-giving laws in place, you have some leeway to make those contributions in a few different ways. Superfunding a 529 plan is a unique gifting transaction that can greatly benefit both the benefactor and beneficiary. Read on to learn how it works.

Annual Contribution Limit for 529 Plans

Every year you can make contributions to your child’s or your grandchild’s (or any person’s) 529 plan. Your contributions are considered a gift and must comply with gifting laws established by the IRS to avoid being subject to taxation.

The IRS recently published the gifting limits for 2022. The new lifetime gifting limit is raised to $12.6 million per person ($24.12 million for joint givers). The annual limit was raised as well. Your total gifts to a person in a single year must not exceed this annual gifting exclusion limit per person. For 2021, the limit for gifting was $15,000 per person/recipient. But for 2022 the annual gift amount is $16,000. So, you’ll be able to gift your loved ones $16,000 (each) in 2022 without having to report that gift. And, if you’re joint gift-givers, your spouse can also gift each person an additional $16,000 for a total of $32,000 a child.

Since contributions to a 529 plan are ruled by gifting laws, this means you can contribute up to $16,000 annually the account, or to each account if you have multiple beneficiaries.

Superfunding a 529 Plan

Any time a person makes a monetary gift to another person, the benefactor’s worth decreases—along with potential tax liability. For high-net-worth individuals and families, gifting presents a legal and clever income tax planning tool. And, for those who want to help fund a loved one’s education and relieve their income tax burden at the same time, superfunding contributions to a 529 plan creates a win-win situation for all.

The IRS allows a person to make 5 years’ worth of contributions to a 529 plan in one lump sum (hence the term “superfund”). This means that in 2022, you can contribute $80,000 to a loved one’s 529 plan (or $160,000 for joint gifters). However, you must designate your superfund to be spread out over 5 years—and not make another contribution to the plan until the 6th year—to enjoy the annual gift exclusion rule. So, if you’re maxing out the allowed annual contribution limit by superfunding a 529 plan, $16,000 would be allotted to that plan each year over a 5-year period.

Gifting Provides Great Benefits for All

Aspirations to achieve higher education should not be impeded by the ever-growing cost of attending universities, and young adults needn’t be saddled with student loan debt as they embark on their career with the rest of their lives in front of them. Opening and funding a 529 plan will enhance the life of your loved one and set them up for success. The benefits you receive by gifting can significantly impact your tax liability and help you reach your financial planning goals.