5 Year 529 superfunding

jrichey29 2015-01-27 19:51:13 UTC #1

Your site includes the 10 things you need to know about superfunding a 529 plan...however, I am looking for a specific answer. Based on today's gift maximum, if you contribute $70,000 to a 529 plan and wait 5 years, can you do the same "super-funding" again after the 5 year period is over? Or is it a one-time election?

Thank you for your help in answering this question.

Jessica Richey
Jessica@vistacp.com

Joseph_Hurley_SFC 2015-01-29 08:21:15 UTC #2

You can make it again in the 6th year after a $70,000 contribution.

Joe

wharmon240 2017-03-02 17:46:29 UTC #3

Can you refer me to a source that supports superfunding the same accounts after each 5 year period. I cannot find any reference material and am not sure this has been addressed by the IRS. Any help would be appreciated.

Thanks.

Pat Harmon, CPA/PFS, CFP

Brian_Boswell_SFC 2017-03-02 21:07:49 UTC #4

The exact language under Section 529 is located under 529(c)(2)(B) and reads as follows:

(B) Treatment of excess contributions
If the aggregate amount of contributions described in subparagraph (A) during the calendar year by a donor exceeds the limitation for such year under section 2503(b), such aggregate amount shall, at the election of the donor, be taken into account for purposes of such section ratably over the 5-year period beginning with such calendar year.

But this isn't really necessary. If the five-year period has passed, then any additional contribution would be unrelated to the original excess contributions, meaning it's treated as a new contribution. If you wanted to do another five-year election, there is nothing stating that you cannot.

Thank you,

Brian Boswell
VP, Research & Development

This information does not constitute tax advice and is provided for informational purposes only. Please consult your tax advisor, financial advisor, local taxing authority, and/or plan provider or sponsor for more information.

sjones1 2017-05-24 19:14:07 UTC #5

@sfc_bboswell: Brian, great presentation today. I appreciated your independent objective plain speak advice. My wife and I are CT residents and want to superfund a direct sold 529 plan. In our retirement accounts, we do like Vanguard's index fund approach. Vanguard is often used in 529 plans. Thus we want to chose the best performing (over the long term- eg 10 years)/lowest cost plan.
1) Would you agree that: NY, UT, PA, OA, and NV are the best states which optimize on long term performance and low cost?
2) Any other states you recommend we look at?

Brian_Boswell_SFC 2017-05-25 01:36:26 UTC #6

All of those states offer great 529 plans, though to be honest, there are many more great options out there. I don't know that I can necessarily agree with your short-list (not sure what OA is!), because there are a number of inexpensive plans out there giving those you've listed a run for their money. Really, though, you should start with Connecticut, especially because you want to Superfund.

Contributions to a Connecticut 529 plan of up to $5,000 per year by an individual, and up to $10,000 per year by a married couple filing jointly, are deductible in computing Connecticut taxable income, with a five-year carryforward of excess contributions (rollover contributions are not deductible). So if you're superfunding and using an out-of-state plan, you're foregoing some significant tax benefits- to the tune of 0.17% annually, according to our state tax calculator (assuming $70k contribution and $200k in income).

So as a superfunder take a close look at Connecticut before deciding to move forward on an out-of-state option.

Thank you,

Brian Boswell VP, Research & Development

sjones1 2017-05-25 15:45:09 UTC #7

@sfc_bboswell: Thanks for the quick response. Let me make sure I understand your feedback. If I compare the following three investments in three different 529 plans. Is your feedback basically stating that despite higher fees in CT (0.02 - 0.05%), the tax carryforward benefits are a greater benefit? If the answer is yes, would you change your mind if I was to only live in CT for maybe 2-3 more years? Thanks again!

CT - TIAA US Equity Index - Total fee: 0.21%
NY - Vanguard Growth Index - Total Fee 0.16%
UT - Vanguard Inst. Index - Total fee 0.19%

rsinj 2017-05-25 22:33:25 UTC #8

Your state tax savings on $5,000 or $10,000/year will certainly outweigh the 0.02-0.05% difference in fund fees.

0.05% in fees is $5 on every $10,000 - I'm guessing your state income tax rate is probably 5% and you do have income against which you can take advantage of the deduction. So you would save $500 in state taxes each year on the $10,000 deduction applied in that year. 2-3 years taking the deduction would be $1000 or $1500 savings. If your total account balance were $100,000 (for example), the 0.05% differential would amount to $50 in additional annual fees - significantly less than your tax savings.

Brian_Boswell_SFC 2017-05-26 16:50:06 UTC #9

I cannot recommend one plan over another, but @rsinj makes some very good points regarding the tax benefits of the in-state plan. If you really want to use the least-expensive plan out there, you could always put in sufficient funds to maximize your state tax benefit, and put the remainder in an out-of-state plan. You also might want to talk to a tax advisor before going this route, though, just to make sure all the carryover contributions line up as expected, and that it makes sense regarding your specific tax bracket and financial situation.

Good luck,

Brian Boswell VP, Research & Development

sjones1 2017-06-12 00:13:04 UTC #10

@sfc_bboswell @rsinj

After reading more and talking with the CT 529 plan representatives, I have proposed the following to my CFP: immediately funding ~175 or 200k into a 529 plan (probably NY, UT, NV, or one of the higher performing plans over the past 10 years with low fees). Finally, I have proposed investing in a glide path strategy (not a static option)

My rationale: I am solving for the cash flow rather than seeking to take advantage of tax benefits. I assume that my child (born this year) will attend a private college in 18 years (thus needing ~500k).

I am cognizant that NY, UT, NV may not be the highest performing plans in the future.

I sincerely appreciate your feedback above. Thank you.