Over the past year, each member of our staff has had a new baby (besides me of course, however Ingrid and I are hoping grandchildren may be in the near future!). New babies always stir up interest in 529 College Savings Plans. For some, the opportunity to “super-fund” a child’s 529 plan may be worth considering.
What’s a 529 Plan?
529 plans are investment accounts operated under the auspices of the state, which allow anyone to contribute funds toward your child’s college education. 529s can be used to pay for qualified educational expenses without any taxes on the withdrawals. Growth is also tax-free assuming the funds are used for approved purposes, including college tuition, fees, books, computers, and room and board.
What is Super-funding?
Super-funding a 529 can make good sense for those with the means to do it, and you can sock away a LOT of money into them. So, how does this work exactly?
Every year, the law allows you to transfer up to $14,000 to any individual, free of gift taxes. However, a special twist on this rule for 529 plans permits you to make five years of annual gift exclusion transfers ($70,000 at the time of this writing) in a single year. A grandfather and grandmother could team up and put in $140,000 in a single year! For those interested in reducing their estate taxes, this is a great way to do that AND take care of a grandchild’s college costs.
Of course, there’s no telling if college costs will continue to grow as fast as they have in recent decades, so even super-funding a 529 doesn’t guarantee that there will be enough money to cover everything. But it’s a great start.
Careful Not to Over-fund!
You’ll also want to be careful not to over-fund 529 accounts, because unless you can transfer the 529 funds to another beneficiary, any remaining money that isn’t spent on college would be subject to ordinary income tax and a 12.5% penalty tax (for California residents). It is possible to make some excellent educated guesses about what college will run your family, and a qualified advisor can help you strike a balance and fund just enough to cover your costs.
Please feel free to contact us if you would like more details about super-funding your child or grandchild’s 529 college savings account.
-Richard Del Monte, CEO