Recently, my clients announced that their son and daughter-in-law were having twins. They were incredibly proud and highly motivated to start saving for their education. I told them about the 529 college savings plan which has recently changed to allow tax-free distributions for private elementary and high school. The 529 plan provides an excellent tool where approved educational expenses like tuition, books, room and board and even a laptop computer may be funded while offering tax-deferred investment returns and tax-free distributions.
Annual gifting rules limit 529 gifts at $15,000 per year, which is adjusted inflation in the future. But what if you need to fill a 529 plan in a hurry because costs have now doubled with twins?
Superfund it!! Under current tax laws, ‘Superfunding’ a 529 college saving account allows you to make five years of contribution ( 5 X $15,000 = $75,000) at one time while still qualifying for the annual gift tax exclusion. This allowed our clients to contribute $75,000 to each child. With two children that totaled $150,000. Lastly, both clients (grandma and grandpa) could contribute this amount making the total $300,000 in the fund.
Imagine the potential for growth that a lump sum of $75,000 would do to help your children’s college fund if you did this when they were born. For example, if you didn’t make any other contribution and the account earned 6% when compounded annually for 18 years, your child would have $214, 075.44 in their account when they entered college.
While superfunding can make sense for some, there are a few things to consider.
First, you should only consider superfunding if you have the money and are not sacrificing your retirement savings. There are a limited number of people who can afford to do this without jeopardizing other goals.
Second, your kid may not choose to go to college. Remember that private elementary and high school tuition are now included. There are also ways to transfer to other beneficiaries while avoiding tax penalties but it’s complicated so discuss this with your tax or financial advisor. For more information see our blog post, Multiple Generations Can Use 529 College Savings Plans.
Finally, be aware of what you may be giving up in terms of state tax benefits. In the state of Minnesota, you have two options: 1) You get a tax deduction of up to $1500 for single filers or up to $3000 if married filing jointly. 2) For smaller investors, you get a tax credit of half of contributions up to a maximum credit of $500, subject to a phase out starting at $75,000 of annual gross income. It might pay to contribute less each year to the 529 plan so as to get the benefit from the tax credit each year.
Whether you decide to save less over time or superfund a 529 account, this kind of investment is an important way to project family values towards higher education for your children or grandchildren. Please let us know if we can answer any questions.
Olson Wealth Group is a full service wealth management firm. With wise counsel and clear strategies, our experienced specialists provide tailored approaches that strive to maximize wealth. For more information, please visit OlsonWealthGroup.com
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. Prior to investing in a 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.