Supercharge a 529 college account by ‘superfunding’ it

As we near the beginning of a new year, your clients have a unique opportunity to boost their contributions in their my529 accounts.

By employing the superfund strategy, your clients can put six years of contributions into their accounts in just a few months — without triggering gift taxes.

Here’s how superfunding works:

Federal tax rules allow an account owner to give up to $15,000 a year ($30,000 for married couples) to a child without incurring a gift tax. A unique provision for 529 educational savings plans also permits your clients to make a front-end contribution to their accounts of $75,000 ($150,000 for married couples) in one year by electing to treat the contribution as if it were made in equal installments over five years. They would need to note this on IRS Form 709. (Note: Any additional contributions from the account owner above this amount to the beneficiary during the five-year period would trigger gift taxes.)

Although such contributions are considered completed gifts, the account owner retains control of those contributions—and the account balance is not included as part of his or her estate.

If your client wants to use the superfund strategy for their my529 account, they would:

  • Make a one-year gift to beneficiary using the allowance of $15,000 by the end of this tax calendar year.
  • Utilize the 5-year gift allowance of $75,000 at the start of the next tax calendar year.

In only a few months, your client will have contributed $90,000 to the account tax-free. And that figure could double to $180,000 if both spouses employ the same superfunding strategy.