Superfund a 529 Plan: What You Should Know

Superfund a 529 Plan
Elliott Appel, CFP®, CLU®, RLP®

Elliott Appel, CFP®, CLU®, RLP®

Welcome! I'm Elliott, the founder of Kindness Financial Planning, LLC, a fee-only, fiduciary advisor located in Madison, WI working virtually with widows and caregivers across the United States. When I'm not helping people live their ideal life, I'm often cooking for my wife, playing tennis, or hiking.

Last Updated on July 16, 2024


A powerful way to start saving for college and remove money from your estate is to superfund a 529 plan. 

Superfunding a 529 plan is where you contribute multiple years’ worth of the gift tax exclusion amount to a 529 plan, file a gift tax return using Form 709, and average the gifts over five years. 

If you are a grandparent or parent with a significant estate and want to help a family member pay for college, superfunding a 529 plan can be a great option. Not only does it transfer money into a tax-deferred account that can later be used tax-free for qualified education expenses, but it also reduces the value of your estate. This is helpful if you are subject to the federal estate tax or if your state has a state estate tax. 

Before reading further, I recommend reading what I’ve previously written on 529 plans. It will give you a good base of knowledge to help make more sense of superfunding a 529 plan. 

Let’s get into the mechanics of superfunding a 529 plan and what you need to consider before doing it.

If you want to listen to an audio version, click play below.

How Do You Superfund a 529 Plan? 

Superfunding a 529 plan requires two steps:

  1. Open and contribute a large lump sum of money to a 529 plan (up to five years’ worth of the gift tax exclusion amount)
  2. File Form 709, a gift tax return

Once your 529 plan is open, you have the option of contributing up to five years’ worth of the gift tax exclusion amount. For example, in 2024, the gift tax exclusion amount is $18,000, which means five years’ worth of contributions equals $90,000. 

You could contribute up to $90,000 to superfund a 529 plan. 

Technically, you could contribute more than $90,000, but then your lifetime federal estate and gift tax exemption amount would be reduced. Currently, that amount is $13.61 million, but it could be reduced in the future. 

The second step of filing the gift tax return allows you to prorate the gift as if it were given over a five-year period. There is a box under Schedule A that you check to indicate this preference. 

Form 709 Gift Tax Return

When you do that, you can’t make additional gifts over the five year period unless the gift tax exclusion amount increases. For example, if the gift tax exclusion amount increases to $19,000 in 2025, then you could give $1,000 more in 2025. If the gift tax exclusion amount does not increase, you can not make additional gifts within the next five years without reducing your lifetime estate and gift tax exemption amount. 

At the end of the five years, you could superfund a 529 plan again, assuming the 529 plan allows the additional contribution. Each state plan has a limit on how much can be contributed, usually ranging between $235,000 and $529,000. 

What If I Don’t Want to Contribute Five Years’ Worth of the Gift Tax Exclusion Amount?

No problem! You can still contribute less, but you still need to average it over five years. You can’t elect to apply it over three years or another time frame. It must be five years. The only exception is if you are giving one year or less of the gift tax exclusion amount. 

For example, if you are giving $18,000 to a 529 plan in 2024, you do not need to file the gift tax return or prorate the contribution over five years. Since it’s equal to the annual gift tax exclusion amount, there is no need to prorate it. 

However, if you wanted to give $60,000 in 2024, you would need to prorate the amount over five years. In that situation, you would make a $60,000 contribution, file form 709, and check the box to indicate the $12,000 proration. 

Since you gave less than the $18,000 annual gift tax exclusion amount, you have $6,000 per year you can still give away each year for the next five years without reducing your lifetime estate and gift tax exemption amount. 

Please keep in mind that in these scenarios, I am assuming you are not making any other gifts to the beneficiary. For example, if you bought your grandchild a car worth $5,000 or gave $500 for a birthday, you need to reduce the amount of the gift by the value of the previous gifts if you don’t want to reduce your lifetime estate and gift tax exemption amount. 

In the car example, you could only give an additional $13,000 in the same year because you already gave $5,000 worth of a gift in the form of a car. 

Or, if you wanted to superfund a 529 plan, you could only contribute $65,000 in the same year. You may be wondering, why can’t I contribute $85,000 instead?

The answer is because you can’t take $6,000 of the additional gift exclusion amount still available and then $18,000 over the next four years. Since the 529 plan contribution must be prorated over five years, you can only give $13,000 per year over the next five years, or $65,000. 

If you tried to contribute $85,000, you would be contributing $17,000 each year when prorated. The $17,000 combined with the $5,000 already given is over the $18,000 annual gift tax exclusion amount. 

You can contribute less than five years’ worth of the gift tax exclusion amount, but you still need to elect the five year treatment for the full amount, unless you are giving one year or less of the gift tax exclusion amount. You also need to consider other gifts given in the current year, which may reduce the amount you can give. 

Why Superfund a 529 Plan?

Superfunding a 529 plan is particularly powerful if you have a younger beneficiary. 

For example, if you had a grandchild who was just born and college doesn’t start for 18 years, that is 18 years of tax-deferred compounding. If used for qualified education expenses, that money can be withdrawn tax-free. 

Let’s look at the growth using a simple example. If you superfund a 529 plan today with $90,000 and that money grows at an annual compounded rate of 8% per year for 18 years with no additional contributions, it would be worth approximately $359,641. Even if it only earned 5% per year, it would still be worth approximately $216,595. 

In both scenarios, the $90,000 grew enough to pay for a good portion of college, or potentially all of it. 

Starting early helps when funding a 529 plan, but even if you don’t start early, late is better than never. For those with larger estates that could potentially be subject to the federal or a state estate tax, superfunding a 529 plan can remove money from your estate, which potentially could reduce your estate tax at death. 

How Does Superfunding a 529 Plan Help My Estate Planning? 

Superfunding a 529 plan can be helpful because it reduces the value of your estate while still allowing you to retain control over the account. 

In most situations, you have to include the value of any accounts in your estate if you retain control, but 529 plans are an exception. 

Dying before five years

If you contribute $90,000 to three grandchildren’s 529 plans, you remove $270,000 from your estate. As long as you live past the five years, the $270,000 is not included in your estate.

However, if you die in those five years, part of the gifts are included in your estate.

For instance, if you died in the third year, you had three years of completed gifts and the last two years would still be included in your estate. This means that $162,000 was removed from your estate ($18,000 times 3 years times 3 grandchildren), but $108,000 is still included in your estate ($18,000 times 2 years times 3 grandchildren).

What’s the benefit of removing money from your estate?

Example of estate tax reduction by superfunding a 529 plan

Let’s say you live in Washington state, which taxes estates above $2,193,000. You already have an estate worth $2,500,000 and feel confident it will be higher in the future because of growth in your real estate and investment portfolio. If you passed away today, a few hundred thousand dollars would already be subject to the 10% estate tax, so you decide to contribute $270,000 to superfund a 529 plan for three grandchildren. 

You remove $270,000 from your estate through that gift. Let’s say you live past the five years and for simplicity, your estate value goes down to $2,230,000. I’m assuming no growth or decline in the estate other than the $270,000 gift for simplicity purposes, but obviously it will likely be different. 

Instead of $270,000 of your estate being subject to a 10% estate tax, you avoid the 10% estate tax on the amount given away and removed from your estate. By giving away $270,000, you reduce the estate tax by approximately $27,000. This means your beneficiaries get more instead of the state. 

This is one small example. Imagine if that same $270,000 grew inside of your estate over the next 10 or 20 years to $500,000 or $1,000,000. 

Even if we assume it is only subject to a 10% estate tax, that is still $50,000 or $100,000 in additional estate taxes. In reality, some of that amount would likely be taxed at 14% in Washington state because the tax rate is progressive for higher estate values. 

If you live in a state without a state estate tax and don’t anticipate being subject to the federal estate tax, superfunding a 529 plan may not help your estate.

Although reducing your estate today is a benefit, the real power comes from the compound growth that occurs outside of your estate when superfunding a 529 plan. The more money that is not subject to an estate tax, the more money your heirs can use for college or inherit instead of being taxed by federal or state governments. 

What Are the Disadvantages of Superfunding a 529 Plan?

There are three main disadvantages of superfunding a 529 plan:

  1. Less flexibility in how you can use the funds
  2. Ordinary income tax and penalties on the earnings if you over contribute and don’t use for qualified education expenses
  3. Potentially miss out on a state tax deduction

Less flexibility

Since 529 plans offer tax advantages, you are limited in how you can use them. Withdrawals are tax-free if used for qualified education expenses, but not everything counts as a qualified education expense. 

You can’t take tax-free withdrawals for insurance, medical expenses, or transportation. 

If you want to travel between college and home, you’ll need to pay out of pocket. If you rack up medical expenses, you can’t distribute money from a 529 plan tax free to pay for them. 

You also can’t take tax-free withdrawals for room and board above the university listed price. For example, if room and board at the university is listed as $15,000 and you spend $15,000 on off-campus housing, you are okay. If you spend $20,000, only $15,000 counts as a qualified education expense that can be distributed tax-free. 

529 plans can be used for a variety of expenses, but not all costs associated with college.

Ordinary income tax and penalties on the earnings

Another big downside of superfunding a 529 plan is if you overfund it. As you saw earlier, if you superfund it early in life, you can amass a significant sum for college. If your child or grandchild chooses to go to a university that costs less than the amount you saved, you have a problem — even if it is a good problem to have! 

Although there are plenty of options if you overfund it, if you choose to distribute the money, the earnings portion will be subject to ordinary income taxes and a 10% penalty. 

Below are options if you overfund a 529 plan and don’t want to distribute it and pay taxes. 

  • Leave the funds in the 529 plan. There is no time limit on when the funds need to be distributed. 
  • Do a 529 plan rollover to a Roth IRA
  • Use it for apprenticeships, K-12 education, or other trade schools
  • Change the beneficiary to another family member. Most plans allow you to change the beneficiary once a year. 
  • Change the beneficiary to you or your spouse and enroll in an educational program 
  • Pay off student loan debt (up to $10,000 per person, which is a lifetime limit)

Although paying ordinary income taxes and a 10% penalty on the earnings for non-qualified education expenses is not the end of the world, a taxable brokerage account is a good alternative to saving for college because it allows for more flexibility in how you use the funds and can still be fairly tax-efficient. 

I usually aim to fund 50-75% of college expenses through a 529 plan because of the lack of flexibility if you overfund it. 

Potentially miss out on state tax deductions or credits

The last drawback is that if you superfund a 529 plan, you may miss out on a state tax deduction or credit. Many states allow you a deduction or credit up to a certain amount each year.

For example, I live in Wisconsin, and they offer a dollar-for-dollar reduction in state-taxable income up to $4,000 for contributions to the Wisconsin 529 College Savings Program in 2024. 

If someone was in the 5.3% marginal state income tax bracket, that is a tax savings of approximately $212. 

If you superfund a 529 plan, you could get the tax benefit in year one, and Wisconsin allows you to carry forward unused deductions into future years. 

However, some states don’t allow you to carry forward unused deductions or credits. For example, it appears Vermont does not allow you to carry forward unused income tax credits.

Some states provide larger tax credits or deductions than others. You should research what your state offers. If you think the tax deduction is small compared to the benefit of tax-free growth for five years, you may want to superfund a 529 plan instead of spreading the contributions out over a few years.

Although there are a few disadvantages to superfunding a 529 plan, they are fairly minor. Superfunding a 529 plan is a great option for people who have money they won’t need to support their own lifestyle and may want to reduce the value of their estate for tax purposes. 

Final Thoughts – My Question for You

Superfunding a 529 plan is a great way to get a jumpstart on college saving. By contributing five years’ worth of the annual gift tax exclusion and filing a gift tax return, you can put more money into a 529 plan without reducing your lifetime estate and gift tax exemption amount. 

The tax-deferred growth and potential for tax-free withdrawals make superfunding a 529 plan early in life very attractive.

Although 529 plans don’t offer the most flexibility, the rules allow you to take withdrawals for many different purposes.

If you overfund it, you have other options, such as changing the beneficiary. In a worst case scenario, you could pay ordinary income tax and a 10% penalty on the earnings. 

I’ll leave you with one question to act on. 

Does superfunding a 529 plan make sense for you? 

Disclaimer: This article is for general information and educational purposes only and should not be considered investment, financial, legal, or tax advice. It is not a recommendation for purchase or sale of any security or investment advisory services. Please consult your own legal, financial, and other professionals to determine what may be appropriate for you. Opinions expressed are as of the date of publication, and such opinions are subject to change. Click for full disclaimer.

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