- Contributions to 529 plans are subject to gift tax exemption limits, which is currently $14,000.
- Superfunding 529 plans means making up to five years of contributions at once.
- Superfunding also permits you to take five years of gift tax exemptions in advance, so no gift taxes will be assessed on a maximum of $70,000 of contributions at once.
The tax advantages of 529 plans make them a popular choice for families to save for higher education expenses. However, contributions to these accounts are considered completed gifts for tax purposes, so anything over the gift tax exemption limit can trigger an expensive tax liability. Fortunately, 529 superfunding offers a way to deposit a larger amount of money upfront, so funds have more time to compound over the years.
Rules for Superfunding 529 Plans
Each year, the IRS places a cap on the amount that you can give another person without incurring gift taxes. In 2014, 2015 and 2016, the exemption stayed steady at $14,000 per person per recipient. For the purposes of a 529 plan, any contributions you make on behalf of your beneficiary count towards the gift tax exemption. Therefore, your generosity to friends and family can cost you more than the amount of the gift if you exceed the exemption limit.
The IRS added the option of superfunding 529 plans to make it easier for families to save towards education expenses. Account owners can make up to five years of contributions at once without running afoul of gift tax rules. For example, an individual can make an initial contribution of $70,000. If both parents choose the superfunding option, they can invest a total of $140,000 upfront without incurring gift taxes.
If you have the opportunity to superfund, it makes good financial sense. The sooner funds are invested, the more time they have to benefit from tax-free compound growth. Remember, 529 earnings are exempt from federal taxes, and sometimes there is a state tax exemption on earnings as well.
529 Contribution Limits
Account owners can change their 529 plan beneficiary to another eligible family member without incurring any federal tax or penalty, so it is fairly simple to reuse any remaining balance for new beneficiaries while retaining tax-advantaged treatment of the 529 funds.
States administer individual 529 programs, and in most cases, they set total contribution limits. However, the limit for each account tends to be quite high, ranging between approximately $200,000 and $500,000. If you expect to exceed this amount, review the plan descriptions for specific states to find a program that meets your needs.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.