🎓 529 Superfunding Unlocked: More Than Just College Savings

☕ Good morning!

Today, we’re exploring how “superfunding” can take 529 Plans from mere college savings vehicles to strategic assets in savvy financial and legacy planning, especially useful for high earners. A few superfunding benefits include: 

🌱 Compound growth: Maximize investment growth with tax-free returns on larger, early contributions.

📜 Estate planning: Strategically decrease the taxable estate, enhancing the efficiency of legacy planning.

🔄 Flexibility and control: Maintain control over the account, with the ability to change beneficiaries or reclaim funds.

🎓 Generational education benefits: Extend educational funding across generations by reassigning beneficiaries if needed.

But, as with most of the IRS’s gracious tax-advantaged accounts, there’s a catch. 

Let’s dive into it! 

💎The real diamond in the rough is Superfunding.

Superfunding allows you to contribute (after-tax dollars) up to five times the annual gift tax exclusion in one fell swoop—$90,000 for individuals or $180,000 for couples. 

Contributions to a 529 plan grow tax-free, and withdrawals used for qualified education expenses, such as tuition, books, and some room and board costs, are also tax-exempt. 

529 plans typically have high contribution limits (often over $300,000 per beneficiary), which allows you to save a significant amount for future educational needs without worrying about exceeding the limit.

You can save more on taxes than investing in a college savings-earmarked taxable account where capital gains and dividends would typically be taxed.

Doing so not only helps you accelerate your kid’s college savings while avoiding federal gift taxes but also significantly reduces your taxable estate, which is a strong first step towards meaningful legacy planning. 

Further, if you've already topped up your other tax-advantaged accounts, such as 401(k)s and IRAs, superfunding a 529 offers an additional route for tax-efficient growth. 

💰 Estate taxes, often called the "death tax," are levied on an individual's assets upon death. 

In the U.S., the federal government sets an exemption threshold, which for 2024 is $13.61 million– if the total value of the estate is below this amount, it is exempt from federal estate taxes. 

The tax rates range from 18% to 40% for estates that exceed this exemption. This threshold is significant because it determines whether an estate will be subject to these taxes at all. Some states will additionally impose their own estate taxes, which may have different exemption thresholds and rates from the federal government.

“Wait a second, I'm young, well below the threshold, and don't plan on dying anytime soon. Why should I care about this now?”

Being young and currently under the estate tax threshold are common reasons to delay planning– but you’d be doing yourself a disservice by delaying learning.

Early estate planning is more about seizing opportunities to maximize wealth and ensure flexibility for unforeseen changes than about preparing for the inevitable. 

It sets a solid foundation, helping you manage and grow your assets tax-efficiently and ensuring your long-term financial goals and legacies are secured, regardless of what life might unexpectedly bring.

🏫 Superfunding lowers your taxable estate and earmarks funds for your child’s future in a tax-advantaged account. 

Let’s keep in mind that 529 plans are specifically designed for education savings, offering tax-free growth and withdrawals when used for qualified educational expenses. These plans can be used as soon as you like, provided the expenses meet the criteria. 

For example, suppose you superfund your 1-year-old’s 529 plan with $90,000. Assuming a 6% rate of return compounded annually, the account would be worth $161,176.29 in ten years.

So, as your kid enters 5th grade and beyond, you’d have the full $90,000 principal and $71,176.29 in tax-free growth to use on any qualified educational expenses– think backpacks, textbooks, private tutoring, private school tuition, and so on.

(note: Be sure to check the specific lists to ensure you’re spending 529 money on the right stuff!)

🍎 Let’s compare 529s to another powerful tax-advantaged account, Roth IRAs, which are primarily for retirement.

Both 529 plans and Roth IRAs are made with after-tax money and grow tax-free, but they have different tax advantages regarding contributions and withdrawals.

With Roth IRAs, you’ll realize the benefits of your tax-savvy efforts when you retire, especially if you expect to be in a higher tax bracket in retirement. Then, you can spend your retirement funds on anything you want, provided you meet the age requirements for withdrawal.

With 529 plans, you’ll realize the benefits as your kid’s education expenses pop up, saving you from purchasing from your savings accounts or with money from other taxable accounts. 

529 plans may also offer state tax deductions or credits on contributions, depending on your state. This is beneficial if you're looking for immediate tax breaks, especially for high earners in states with higher tax rates. 

Starting in 2024, beneficiaries of Section 529 accounts can roll over funds to their own Roth IRAs, not exceeding $35,000 in their lifetime. 

The yearly cap is equal to their IRA contribution limit minus any direct IRA contributions made that year. A few limitations include: the 529 account must have existed for at least 15 years, and contributions or earnings from the last five years are ineligible for the rollover. 

Moreover, the beneficiary needs compensation matching the rollover amount and isn't restricted by income limits that usually apply to direct Roth IRA contributions.

Would superfunding a 529 plan make sense for you? Get started with free Financial Analysis to explore how it, and other relevant strategies, could work for you. 

🧐 But what’s the catch? 

Like any investment, superfunding a 529 plan isn't without its nuances. 

There's the Five-Year Rule to consider—if you pass away within five years of the contribution, part of it might revert to your taxable estate.

Additionally, non-qualified withdrawals could still trigger taxes plus a 10% penalty. 

Making Cents of Superfunding 529 Plans

Superfunding a 529 plan is a strategic financial lever for high earners, not just a way to save for college and other educational expenses.

By allowing a significant, one-time contribution—up to $90,000 for individuals and $180,000 for couples— superfunding exploits the annual gift tax exclusion to maximize savings without triggering federal gift taxes, leading to a triple win:

1. Accelerate savings for your child's future educational expenses

2. Reduces your taxable estate

3. Creates another tax-advantaged account for your money to grow.

🕜 As with nearly all financial strategies, timing is everything: superfunding a 529 during a market dip can position the fund for potential growth as markets recover, enhancing your money’s impact thanks to compound growth over time.

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Until next week! 

Dan from Tailored Cents

P.S. Follow me on LinkedIn for more tax gems to save you money.