Superfund Your Child’s Future

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

As a parent, you want the best for your children, and you want them to go out into the world equipped with solid values, discipline, and an occupation that will help pave the way for a successful life, both financially and professionally.

If their chosen profession is non-trade related, that more than likely means going to college for at least four years – and potentially longer if they seek post-graduate degrees. And if you haven’t been paying attention, college is getting more and more expensive, easily outpacing inflation

There are a few options available to you:

  1. Your child could work during their high school years to save up for college themselves, then obtain as many grants and scholarships as possible and apply for student aid and/or student loans for the remainder.
  2. Encourage your child to stay home and go to a 2-year state or community college, while working and saving to finish their degree at a 4-year university, thus saving money in total education costs.
  3. Save for their college education while they’re young and spare them the high-interest debt.

For the purposes of this article, we will focus on the third and last option for saving for your child’s college education.

But if inflation is outpacing your savings, how can you be expected to save for their tuition, room, board, supplies, and equipment when your dollar will lose its value year after year, always playing catchup to the double impact of inflation and tuition inflation?

Fortunately, we have available to us, specifically designed investment accounts that allow us to save up for our children’s college education in a tax-efficient manner, independent of tax-advantaged retirement accounts. 

The 529 Savings Plan

A 529 Savings Plan allows you to purchase investments such as stocks and bonds, let those assets grow tax-free, and make tax-free withdrawals as long as you use them to pay for your beneficiary’s qualified college expenses, such as tuition and fees. There are no hard annual funding limits, though your state will have its own lifetime limit. All the same, contributions are counted as gifts, so anything over $18,000 in 2024 will be taxed accordingly – maybe. More on gifts later, though. 

How Much Should You Contribute? 

Let’s say your child’s tuition will cost $50,000. Simply saving money for that bill is possible, but again, you’re working against inflation and college tuition, and $50,000 is a lot of money. A careful investment strategy can likely get you there without needing to personally save even close to $50,000, especially if you start right when your child is born. 

Using a retirement account is likely not an option because of early withdrawal penalties; plus, those funds are earmarked for retirement. You can invest within a brokerage account, but you’ll face taxes on your withdrawals and potentially on an annual basis, depending on your investments. 

A 529 plan can give you the advantage you need. 

Dollar-Cost Averaging

How much would you need to invest to reach $50,000? 

Assuming a dollar-cost averaging strategy with even contributions over 18 years and a 10% growth rate in line with historical S&P 500 rates, you’d need to invest $1096.52 a year, or about $19,737.36. 

You saved yourself over $30,000 by letting your money work for you instead of you working for money.

How Much Will You Need to Save Each Year for College?

Tuition Growth Rate Calculator

Tuition Savings Calculator

Assuming a 10% Rate of Return. Past performance does not predicate future performance. Used for educational purposes only. Your real-world results will vary.

Lump-Sum Investing

If you have some savings lying dormant, you could consider executing a one-time lump sum that could save you even more money than a slow and steady dollar-cost averaging strategy.

To reach a future value of $50,000 after 18 years with an annual interest rate of 10%, you would need to invest a lump sum of approximately $8,992.94 today. A $10,000 tuition sounds much more affordable than a $50,000 one, right?

Investment Growth Comparison
Assuming a 10% Rate of Return. Past performance does not predicate future performance. Used for educational purposes only. Your real-world results will vary.

Even if you don’t reach your tuition goals, you’re likely to have grown your funds in a tax-efficient way. However, remember that a 529 plan does involve investing, and there’s no guarantee that your funds will grow – in fact, you could lose money. 

However, you could reduce that risk by partnering with a financial advisor whose job it is to not just grow but secure your funds with risk mitigation strategies. 

529 Plan Superfunding

Earlier in this article, we mentioned gifts and gift taxes. In 2024, you can contribute up to $18,000 per beneficiary per 529 plan without triggering gift taxes. However, you can elect to front-load five years’ worth of $18,000 contributions into one lump sum, equivalent to $90,000, with the caveat that you can’t claim a gift tax exemption for the next five years for that beneficiary. 

Ok, if you have $90,000 lying around to contribute to a college plan, you can probably afford to simply pay for your child’s college with cash. Why would you contribute to a 529 plan?

Superfunding as an Estate Tool

Superfunding a 529 plan can instead be framed as an estate planning tool. At the end of 2025, TCJA estate tax exemption limits will be cut nearly in half. In 2024, the exemption amount is $13.61 million per individual – anything after that is taxable were you to pass away today. 

So, let’s imagine that you have a sizeable estate, and you’d like to leave a significant portion of your net worth to your beneficiaries. Rather than continuing to grow funds that would lead to a taxable event, it may make sense to remove those funds from your taxable estate and allow them to grow outside of it. 

A $90,000 lump sum, assuming a 10% growth rate, will become over $600,000 after 18 years. 

Lump Sum Growth Chart with Highcharts
Assuming a 10% Rate of Return. Past performance does not predicate future performance. Used for educational purposes only. Your real-world results will vary.

Additionally, with a 529 plan, those funds remain under your control, and you can switch beneficiaries as you wish, say, to a niece or nephew. Then, your beneficiary can roll over any leftover funds to a Roth IRA -within annual traditional Roth contribution limits and a lifetime rollover limit of $35,000. 

Best of all – there are technically no limits on how many 529 Plans you can superfund, and your spouse can contribute the same amount. So, as a couple, you could jointly contribute $180,000 to a child’s 529 and another $180,000 to a niece or nephew’s. However, lifetime gift exclusion limits will apply, as might state tax. In 2024, the gift tax exclusion amount is the same as the estate tax exclusion limit – $13.61 million – and again, that figure will be cut in half once TCJA sunsets. What that means is if you gift away more than 13.61 million dollars over the course of your lifetime, you’ll owe tax on the excess amount. 

In Conclusion

Considering whether a 529 Savings Plan fits into your portfolio? If you have a child, grandchild, or any other loved one whose future college tuition you wish to support, the answer is most likely yes. Furthermore, if you’re seeking a tax-efficient strategy to decrease your estate while funding a beneficiary’s (or multiple beneficiaries’) education and potentially establishing a well-funded Roth account for them, then a 529 Plan could be an excellent choice for you, too.

Regardless of your specific goals, a fiduciary financial advisor can help you optimize your strategy and enhance the likelihood of your loved ones graduating without the burden of high-interest debt. To discover whether a 529 Plan aligns with your financial situation, click the button below to learn more.

Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

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