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How to Superfund a 529 for College Education

a textbook with a pen next to stacks of coins and a tipped jar of coins.

If you don’t have a head start on saving for your child’s college tuition, it can seem overwhelming. However, you can make up for lost time with a trick called “superfunding” a college savings account.

Saving money early remains one of the best ways to prepare for your child’s college education, and a popular way to save is with a 529 plan. This state-sponsored savings account (also known as a “qualified tuition” plan) allows you to set aside funds tax-free to pay for future education expenses.

If you want to know a little more about how the 529 works, and the specific rules to open a fund, the United States Securities and Exchange Commission provides in-depth info.

What Is Superfunding?

The IRS caps savings in a 529 plan in 2019 to $15,000 per year, per person. This means a married couple could contribute up to $30,000. There’s a cap because the government taxes the money you invest in a 529 fund as a gift.

There’s an exception, though—the IRS allows individuals to superfund a 529 with up to five years of savings. This means instead of contributing $15,000, you could add $75,000 to your savings upfront. If you have the extra cash, superfunding a 529 results in higher returns (a larger sum of money that earns interest over time) than annual contributions.

For example, if you contribute a lump sum of $75,000, and the account earns 5 percent interest over 15 years, the total amount would be $155,919.

Alternatively, if you contributed $5,000 per year for 15 years (you’d still invest a total of $75,000), the balance would be $118,287. That’s a difference of more than $37,000!

When you contribute money to a 529, it grows with taxes deferred. If you can start it with a larger lump sum, it results in a much larger payout at the end.

Some Cautionary Notes

Superfunding looks great on paper, but most people cannot realistically afford to set aside that much money. Before you dedicate that much money upfront, make sure you’ll still be able to save for retirement, pay off debt, and meet your other financial needs.

If your child doesn’t go to college or you don’t use the money for your own education, you can withdraw the funds for personal use. However, you must claim any funds you withdraw as taxable income and pay a tax penalty on any earnings.

Lastly, some states offer tax benefits on money you contribute to a 529 plan. If you choose to superfund the 529, you might miss out on those each year.

How to Choose a 529

Whether you choose to superfund or contribute annually, investing in a 529 is a simple, easy way to increase savings for your child’s education. Keep in mind you don’t have to contribute to your state’s 529 plan—you can open one in any state you want. Check out each one, and figure out which would get you the most for your money.

Also, keep in mind, you can also invest in a 529 with an advisor, but if you do it directly, you save money on investor fees.

Superfunding a 529 has significant financial benefits. But it’s an option that works best for individuals and families who can afford to set aside the money without risking their retirement or emergency fund.

Flight attendants always instruct passengers to put on their own oxygen masks before helping others. The same principle applies to finances—make sure you take care of your needs before you set aside a large amount of money for your child’s education.

If superfunding a 529 would cause a financial strain, your best option might be to make the more manageable annual contributions.

Angela Brown Angela Brown
Angela has 14 years of writing and editing experience, including as a reporter and copy editor for two newspapers. Angela has a Bachelor's in communication with minors in creative and technical writing from BYU-Idaho. She works closely with real-estate and financial industry clients. Read Full Bio »
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