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Superfunding a 529 Plan

Superfunding a 529 plan is a powerful loophole that works around the normal contribution limits on 529 college savings plans, allowing you to supercharge the plan upfront with multiple years of contributions at once. This allows the plan’s beneficiary to optimize the power of compounding growth before withdrawing funds when they reach higher education, as more money is growing from the beginning. For those physicians who can afford to make larger contributions, overall this option can increase the amount of money saved for a child’s education (or other planned uses of the 529), give you another venue for tax advantaged growth, and/or make up for a late start to contributions for your children’s 529. Below, we cover what superfunding a 529 means, the benefits of superfunding if it fits within your financial planning, how much you can contribute at once, reporting requirements, and restrictions to consider, including discussing gift tax exclusions and lifetime gifting exemptions.

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Quick overview of superfunding a 529 plan, including pros and cons

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What is a 529 plan?

529 plans are a type of tax-advantaged account traditionally used for college savings, though plans in recent years have expanded to now include several different higher education and private learning expenses.

Eligible expenses for a 529 plan

529 plans are set up as plans for beneficiaries. Anyone can set up a plan and fund it, but how funds are contributed and used depends on who is the named beneficiary of the account. The most common use we see for 529 plans is for children, but they can be used for spouses, grandchildren, nieces and nephews, and other family members as well.

Contributions that you make to a 529 plan are post-tax, so these types of plans don’t usually offer tax breaks for the year of funding, although some states offer tax breaks against your state income tax if you use the 529 run by your state.

The true power of the 529 plan are the tax advantages for the plan’s beneficiary. Funds inside of a 529 plan grow tax-free, and distributions are also not taxed if used for a qualified educational expense, such as those listed above.

What are the contribution limits for 529 plans?

The government knows the power of tax-free growth, so wherever there are tax-advantages, there are limits on how much you can contribute.

Since 529 plans work under a beneficiary design, contributions are limited by gift tax laws.

For 2024, the annual gift tax limit is $18,000. It’s important to note that this limit is by person to each beneficiary. So if you are married, both you and your spouse can contribute up to the $18,000 max each annually without running into tax issues. Grandparents and other family members can contribute as well, up to the plan contribution maximum limit, which depends on which state you open the plan with.

It’s important to note that the gift tax annual limit doesn’t only consider 529 contributions, but all money given to the beneficiary. So if you have already gifted your child $5,000 by other means, you would only be able to contribute up to $13,000 ($18,000 - $5,000) for their 529 plan.

What does superfunding a 529 plan mean?

Superfunding a 529 plan is a completely legal way to front-load a 529 plan by making five years of contributions all at once with a large, lump-sum contribution that will not count against your federal gift exclusion. This can be repeated every five years.

In 2024, with the $18,000 annual contribution limit per child per parent, you could contribute up to $90,000 per child per parent

You can also choose to contribute more than $18,000 but less than the full potential superfunding amount, but there are some rules to keep in mind here. See the contribution limits section below for more details on this.

Each parent has their own exclusion amount that they will report on IRS form 709 for each of the 5 years across which the gift has been spread. 

Since the power of investing within plans like 529s is the tax-free growth, the more time the contributions have within the account to grow and compound, the better. While we see these effects dramatically within our retirement accounts because of the decades of potential growth, since 529 plans are usually used for college or graduate school funding, for most beneficiaries, they’ve only benefitted from about two decades of growth. 

As such, the power to front load 529 plans early with a larger amount of money upfront gives more money the maximum potential growth and can be highly enticing. 

Superfunding a plan pro-rates your contributions over the next five-year period. As mentioned above, this can require some intentional estate planning ahead of time, as it will affect your gift tax limits to your children over the five-year time period. If you have other gifts you are hoping to make, you may want to speak with your accountant or your financial advisor first.

Given this proration method, if you are planning on superfunding a 529 account, we recommend contributing as much up front as you think you’ll need, up to the account limits. If you aren’t in the financial position to take advantage of superfunding yet (you should always prioritize your regular retirement investing before focusing on funding college savings for your heirs), you can still fund a 529 plan under the regular limits until you are able to superfund the account. There is no requirement to “use or lose” the superfunding option the first year of funding the account.

What are the benefits to superfunding a 529 plan?

Compounding growth

The biggest benefit to superfunding a 529 plan is the advantage of time for your compounding growth.

The power of superfunding a 529 plan with one parent

By superfunding an account only once, your child’s 529 plan could potentially grow (as an example) an additional $20,000 in the first five years. And that’s if you only take advantage of superfunding for one parent once. You could superfund the account again five years later.

In addition, if both parents want to superfund the account, the difference will be twice as much.

The power of superfunding a 529 plan with two parents

You could super fund again five years later in this situation as well if you still wanted to fund the account and haven’t reached the state maximum contribution limits yet, further amplifying the differences.

Depending on how much you forecast needing for savings and how much additional you have to invest, you may be able to superfund a 529 plan once up front and then simply let the account grow for a “set it and forget it” contribution strategy to check college savings off the list for your children. Since 529 plans can be passed down from generation to generation, you could also overfund a 529 plan past what you think your child will need as early estate planning for future grandchildren.

Even if you decided not to add any additional funds, if you super fund a 529 plan while your child is young and let it grow, compound interest can carry significant rewards by the time they start higher education, allowing the account to more than triple versus what you invested!

The power of superfunding a 529 plan and letting it grow for 15 years

Estate planning benefits

Superfunding 529 plans for your kids can be a great way to pass on generational wealth while they are young to help reduce the amount of estate taxes they pay later, if applicable. This strategically decreases the overall taxable estate later, which can be substantial depending on the federal estate tax threshold and state and local taxes, if applicable.

As an added benefit, your children can receive a part of their inheritance younger, when the gift can have the most impact in their lives. Waiting until you pass could leave them inheriting a large sum of money once they are already well on their way to financial independence and don’t need it, just as you are now if you’re considering superfunding as an option.

Superfunding a 529 plan also allows you to transfer this part of your estate to your kids and let it grow tax free under their name, versus the funds growing taxed in your name before transferring to them later on, which has additional tax-savings benefits.

Lastly, because you can change the beneficiaries to future generations, there are additional tax benefits to passing on wealth through the 529 when taking into account the generation-skipping transfer tax (GSTT).

Considerations when superfunding a 529 plan

As superfunding a 529 plan is a special allowance, there are a few different considerations to keep in mind when using this strategy.

Considerations to keep in mind when superfunding a 529 plan

Contribution limits

Keep in mind the contribution limits above, including all other gifting (we can’t stress this enough). Funding an account above the per person gift tax limits can have major tax implications.

Superfunding is all or nothing for the 5-year time period

The proration rule over a 5-year period is firm. You cannot elect to contribute less and pro-rate it over fewer years. For example, superfunding a 529 plan with $54,000 (or 3 years’ worth of the $18,000 annual contribution limit per person) won’t allow you to pro-rate $18,000 over three years. In this situation, your annual contribution would come out to $10,800 for the next five years.

You also wouldn’t be able to contribute $54,000 and elect superfunding treatment for only $40,000 of the contribution. All eligible contributions to the plan will be spread across the 5-year averaging.

You may, however, be able to superfund more than once

If you do not max out your annual gift tax limit, you may still be able to superfund a 529 more than once in the same 5-year period. For example, if you did the $54,000 contribution above the first year and elected superfunding treatment, you could potentially make another superfunding contribution of up to $36,000 the second year and have it pro-rate as well. This isn’t a clearly stated rule, so speak to your tax professional before making this decision, but there isn’t anything saying it can’t be done. 

To lower the record keeping and paperwork burden, as well as risking accidentally overfunding the account by losing track of your superfunded contributions, we recommend doing superfunding all at once up front. This allows you to better take advantage of compounding growth as well.

Each contributor has to file a gift tax return

If you choose to superfund a 529 plan, you will be required to file a gift tax return with the IRS Form 709 each of the five years included in the superfunding time period.

As we’ve mentioned above, the gift tax limit is set by person. If you have two parents superfunding $90,000 each for a total of $180,000, make sure both fill out gift tax returns. Likewise, if other family members are contributing, they will need to make sure to file gift tax returns as well.

Changes to annual gift limits change the superfunding limit

The IRS assesses annual limits every year and takes inflation into account. Depending on how much inflation has impacted the economy, they may raise the annual gift tax exclusion limit. When they do, the superfunding limit will also increase correspondingly. It will always be 5 years of the annual gifting tax exclusion limit.

An increase in the annual limit is a situation where you may want to consider superfunding again within the same 5-year period.

A note on additional gifts during this 5 year period

Again note that if you elect to superfund the account, you have to be careful about any other large gifts, which will also count towards the gifting amount you are allowed for each year. So if the plan is for Grandpa to superfund a grandchild’s 529 account using the full $90k amount, they cannot also gift them another $10k to pay for something else during one of those years, like a summer program or a new vehicle.

Should I superfund a 529 plan? 

Superfunding a 529 plan can be a great way to supercharge your children’s (or grandchildren’s) college savings and a powerful estate planning tool for physicians. It is often used by or recommended to wealthy physicians who are in the financial position to take advantage of this legal workaround for gift tax limits. This can also be a great use to consider when deciding what to do with a financial windfall such as an inheritance, big bonus, or profits from the sale of a real estate property or business.

As a reminder, though, you shouldn’t be superfunding a 529 at the expense of your own retirement savings or other cashflow needs. First and foremost, make sure you are covered for retirement before looking at generosity for the next generation. Once you have made the contributions to the 529, they belong to the beneficiary. Similarly, if you have a large expense coming up like a down payment on a house or a practice buy in, it may not be the best time to superfund a 529 if it will limit the amount of money you need to live your life now.

The other thing to of course always think about with a large sum of money like this is what your other options are with that money. For example, if the money was going to sit in a high yield savings account and generate money in a tax inefficient way, this may make a lot of sense, but if you have a good investment opportunity that will yield even greater returns than the 529 will, it may not be the right year to superfund.

Not sure if you’re in the position to superfund a 529 plan yet or if it's your best investment option at this time? You can contact one of our financial advisors for physicians to discuss your financial plan and whether it makes sense at this time.

Additional college savings resources for physicians

Superfunding a 529 plan is high level investing and estate planning as you plan for passing on your legacy to the next generation. We have a wealth of additional resources to help you along the journey.

Find a financial advisor databases for physicians for guidance with retirement and college planning.


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