And while many families might not have the means to contribute more than the annual gift tax limits ($16,000 per individual, per recipient, in 2022), wealthier families have the option of ‘superfunding’ these accounts beyond this limit without using their gift tax exemption. The superfunding exception allows individuals to fund up to five years’ worth of 529 contributions to a given beneficiary in a single year, without triggering gift taxes when the contribution is made to the child’s 529 plan. For example, a parent could contribute $80,000 into a 529 for their child in 2022, and not have to use any of their gift tax exemption… as long as they do not make additional gifts to that child for five years. Given the additional years of potential compounding (with tax-free growth potential), superfunding a 529 could lead to a larger account balance by the time the student goes to college compared to making smaller annual contributions.
At the same time, there are limits on how much someone might want to contribute to a 529 account. For example, because of the limited tax-free uses of funds in a 529, a parent or other contributor might not want to ‘overfund’ an account beyond what the account’s beneficiary is likely to need for college or graduate school expenses (especially if the parent has other financial priorities of their own!). On the other hand, the parent can choose to fund more and plan to change the beneficiary to a sibling or another individual who will have education expenses. And some families might even consider contributing so much into 529 accounts that it funds not only college for their children, but has enough left over to benefit further generations down the line. These ‘Dynasty 529’ plans have the potential benefit of perpetual tax-free growth, but come with several potential pitfalls to navigate (e.g., gift tax and Generation-Skipping Transfer Tax implications, as well as the possibility that a future beneficiary will use the funds for something other than education and pay the associated taxes and penalties).