Advice and the Advisor

Should you super fund a 529 college savings plan? Here’s what experts say

Key Points
  • You can kick-start education funding with a larger, upfront contribution to a 529 savings plan.
  • "The earlier you get money into a college plan, the more it will grow," said certified financial planner Mari Adam of Mercer Advisors.
  • However, you'll generally pay a 10% penalty and income taxes on earnings if you tap the account for noneducation expenses.
Kevin Winter | Getty Images

If you're eager to jump-start an education fund, you may consider a larger, upfront contribution to a 529 college savings plan.

While the average account balance was $30,287 in 2021, according to the College Savings Plans Network, depositing and investing sooner may pay off, experts say.

"The earlier you get money into a college plan, the more it will grow," said certified financial planner Mari Adam, senior wealth advisor at Mercer Advisors in Boca Raton, Florida.

A 529 plan allows you to grow money tax-free for qualified education expenses, such as college, vocational school or up to $10,000 of K-12 tuition per year. 

While there's no federal tax deduction for contributions, you may qualify for a write-off at the state level, depending on where you live, Adam said.

Plan contribution limits vary by state, ranging from $235,000 to $550,000, according to Saving for College.

Front-loading contributions may also avoid missing future deposits since only 37% of 529 plans currently receive automated savings.

The best time to invest is when you have the money available.
John Loyd
owner at The Wealth Planner

"The best time to invest is when you have the money available," said John Loyd, a CFP and owner at The Wealth Planner in Fort Worth, Texas, pointing to upward stock market trends over time.

Of course, there's a risk of overfunding a plan if the beneficiary doesn't need funds for education. You'll owe income taxes and a 10% penalty on earnings for nonqualified withdrawals. However, there may be other options for the money.

"These plans have tremendous portability," said Philip Herzberg, a CFP and lead financial advisor at Team Hewins in Miami, explaining you can change the beneficiary to another family member or even a future child after they are born.

Super funding 529 plans

Another technique, super funding a 529 plan, may appeal to wealthy families trying to reduce future estate taxes through gifting.

You can give away $16,000 per gift in 2022 without owing federal gift tax. And many won't owe levies for larger amounts, either.

"Most people don't have any kind of gift tax issues," Loyd said.

That's because the federal estate and gift tax lifetime exemption is currently $12.06 million per person in 2022. But it reverts to $5 million adjusted for inflation in 2026 when part of former President Donald Trump's signature tax law sunsets. 

VIDEO2:0702:07
Navient to cancel $1.7 billion in student loans as part of settlement

If you expect your estate to be larger than either of those amounts when you die, you may avoid gift tax by "super funding" a 529 plan with five years of contributions at once, removing that money from your estate.

For example, if you're single with an estate over the lifetime exemption, you may contribute $16,000 times five years or $80,000 in 2022 without paying gift tax (or $160,000 if your spouse agrees to "split" gifts.)

"This is really a fabulous opportunity to get money into college plans," Adam said.

And recent stock market volatility may present opportunities, Herzberg explained. "You want to take advantage of those depressed prices with a lump sum investment."