Should Your Clients 'Superfund' Their 529 Plans?

Is 529 Plan Superfunding Right for the Client?

A superfunding strategy will, of course, tie up more funds within the 529 account. That means it’s important for the client to evaluate the rules, understand the flexibilities associated with 529 plans and determine whether making a large lump-sum gift to the account is the right move.

Clients are permitted to fund multiple Section 529 plans for different beneficiaries without gift tax consequences, as long as the annual contribution for any particular beneficiary does not exceed the annual exclusion amount. The client is also permitted to change the original account beneficiary — for example, if one child chooses not to attend college, they could change the beneficiary to another child.

Clients should also be aware of changes that went into effect beginning in 2018 to make 529 plans more flexible. Under prior law, qualified education expenses for Section 529 plan purposes were generally limited to costs incurred to pay for post-secondary school (meaning tax-free withdrawals were limited to withdrawals to cover the costs of attending college or university).

However, the 2017 tax reform legislation expanded the reach of Section 529 plans so that clients may now use up to $10,000 in 529 plan funds per year for elementary or secondary school expenses (although it remains important to check with the plan itself to confirm that they have modified their rules to implement this new federal rule).

The new $10,000 limit for elementary and secondary school expenses applies on a per-child basis, so that even if the child is beneficiary of multiple Section 529 plans, he or she may receive only a total of $10,000 in pretax distributions annually for pre-college educational expenses.

Tax reform also modified the Section 529 plan rules to permit a tax-free rollover of 529 plan funds to an ABLE account with the same beneficiary, or a beneficiary who is a family member. ABLE accounts are similar to Section 529 plans, but are designed to provide tax-free distributions to cover expenses of individuals with various disabilities. Funds that are rolled over count against the $16,000 annual contribution limit for ABLE accounts.

Conclusion

The rules governing 529 savings plans are nuanced. For the right client, however, superfunding the account can prove to be a valuable strategy to maximize the currently high gift tax exclusion.