College 529 Superfund Plan for Even Greater Compound Interest Savings
With the 529 plan, you can save on college for your kids while also getting some tax benefits. Basically, it is an investment account that you can only use for future college expenses. While there are limits to how much you can save, the IRS rule allows you to save even more in one go so you can earn more over time.
Any money saved in the 529 plan is considered a gift for tax purposes. This means that there are limits on how much one person can contribute, and in 2016 the annual gift exclusion amount is $ 14,000. But you can also pre-fund the 529 plan, saving you up to five years. This is called superfunding, and this is how financial site Bayalis Is the Answer explains it :
Let’s make the numbers. Rather than being capped at $ 28,000 a year, a two-parent family could grow to a whopping $ 140,000 ($ 14,000 * 5 * 2) to fund 529 in one year. You are usually allowed to give one recipient tax-free gifts for five years in one year. If you have a wealthy grandparent who wants to get rid of taxes in order to sell some of their property, you can save even more.
We don’t have access to $ 140,000 to save $ 529 in one year (we selfishly fund our own early retirements), or access to rich grandparents. But we made a little superfund. We started it with $ 48,000 at its 529.
As with most savings accounts, the more money you have to save and the more time you have for that money to grow , the greater your profit margins. In fact, in the full version of the post, Bayalis shows the difference between saving a one-time amount of 529 and distributing the savings over time:
Suppose couple A invests a total of $ 70,000 in their 529 daughters, but they do so at $ 14,000 per year for the first five years of her life. Couple B decides to deposit superfunds and first invests the entire $ 70,000. Assuming an annualized return of 5% … Superfunding brought in $ 15,298.14 more.
To Super Fund 529, you simply have to add money to your account and then fill out Form 709 at tax time. To learn more about this method, head over to their full post at the link below.
YOUR 529 ON STEROID: A GUIDE TO ADDITIONAL SUPERFINANCE FOR BUSES | Bayalis is the answer