A 529 plan is a college savings account that is exempt from federal taxes. It was introduced in 1996 and allows parents or grandparents to invest in their children's educational future.
According to U.S. News, it's important to know and understand what kind of tax benefits, if any, your home state offers.
Superfunding refers to a rule which allows parents or grandparents to contribute up to $70,000 one-time, per beneficiary without incurring IRS gift taxes.
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The benefit could be extended to $84,000 if the maximum yearly allowance of $14,000 is given in December of one year and $70,000 in January of the next year. (That larger amount can be contributed at one time but has to be accounted for over five years on taxes. This is a special rule for 529 plans) Those rules makes a maximum super-loaded option of gifting $84,000 tax free. This could be done by one person for several different beneficiaries,
according to the IRS.
This kind of super funding could allow parents or grandparents to take advantage of other tax savings. For instance, some states allow sizable tax deductions or credits for contributing to 529 plans.
Reuters reports this plan can allow grandparents to "get substantial amounts of money out of their estates" while designating how the money they pass along to grandchildren will be used. If the money is not used by a beneficiary, it can be passed along to another family member.
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It is important to talk to a financial planner about the best ownership set-up for this kind of giving. The ownership of the 529 plan will affect Student Financial Aid, as well as future tax implications.
The advantage of 529 plans is that they do not have yearly funding limits. They usually DO have some kind of upper limit, based roughly on the anticipated actual costs of college. For many states that amount starts at about $300,000, a sum which includes both the original investment and the growth.
For parents who have a bonus structure at work, these lump sums of money can be added as another kind of "superfunding" for a 529 plan. For strategizing this kind of funding, parents should look at their state tax incentives for credits and deductions.
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