An Alternative to 529 Plan Superfunding

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Kathryn Flynn

By Kathryn Flynn

January 18, 2022

Superfunding a 529 plan can help jump-start a child’s college savings while sheltering a large amount of assets from the donor’s taxable estate. However, wealthy grandparents may be able to make a larger tax-free gift by using up part of their lifetime gift and estate tax exemption.

What is superfunding?

Superfunding, or 5-year gift-tax averaging, allows families to front-load large contributions to a 529 plan without having to pay gift taxes, while protecting their lifetime gift and estate tax exemption.

The annual gift tax exclusion amount is $16,000 per donor per beneficiary in 2022. With 529 plan superfunding, individuals may contribute up to $80,000 ($160,000 for couples) per beneficiary if the contribution is treated as if it were spread over a five-year period. Taxpayers must report 529 plan contributions between $16,000 and $80,000 on IRS Form 709 for each of the 5 years, and check a box to indicate that the contribution is being spread ratably over 5 years.

Form 709 Picture

Source: IRS Form 709

Superfunding helps a 529 plan beneficiary save more for college. Over time, a lump sum contribution will generate more tax-free returns than making monthly contributions totaling the same amount.’s Superfunding Calculator (subscription required) illustrates the accumulation benefits of using 5-year gift tax averaging versus making monthly contributions.

For example, grandparents who superfund a 529 plan with $30,000 for a 6-year old grandchild will have an ending balance of $60,366 when the grandchild reaches college age, assuming a 6% annual investment return. However, if the grandparents instead make monthly contributions of $208 over the same 12-year period with the same investment return, they would only have $44,220 when it’s time to pay for college.

Some grandparents also use 529 superfunding as an estate planning strategy because they are able quickly remove a large amount of assets from their taxable estate. The grandparent also retains control of the assets throughout the life of the 529 plan account.

If the grandchild later decides not to attend college or the grandparent needs the funds for a medical emergency, they may withdraw from the 529 plan account and take back the funds. However, the earnings portion of non-qualified withdrawals are subject to income tax and a 10% penalty. Also, if the gift is revoked, the value of the assets will be added back to the grandparent’s estate.

Drawbacks of superfunding

The estate planning benefits of 529 plan superfunding are not as beneficial if the gift giver dies within the five-year period. For example, if a grandparent contributes the maximum $80,000 and dies during the third year, only the first $48,000 is considered a completed gift and the remaining $32,000 will be added back to the grandparent’s estate and will be subject to estate taxes.

Superfunding may also prevent grandparents from being able to fully fund a grandchild’s college education. With superfunding, the maximum a couple may gift at once is $160,000, which may not be enough to cover the future cost of attending a 4-year college.

An alternative to superfunding

Superfunding sets a limit that may discourage wealthier families from giving more as lump sum. However, one way to get around the limit is for the gift giver to use up part of their lifetime gift and estate tax exemption. The lifetime gift and estate tax exemption is $12.06 million per individual in 2022, with inflationary adjustments in subsequent years until at least the end of 2025.

Individuals are not subject to gift tax or generation-skipping transfer tax (GST) unless the total amount of cash and properties they give away over the course of their lifetime exceeds $12.06 million. 529 plan aggregate contribution limits range from $235,000 to $550,000, depending on the state. Therefore, it is possible to fully fund a 529 plan account without having to pay gift taxes.

According to the IRS, 529 plan contributions may not exceed the amount necessary to pay for the qualified education expenses of the designated beneficiary. Each state has a maximum aggregate limit for 529 plans based on what the state believes is the full cost of attending an expensive college and graduate school, including textbooks and room and board. Maximum aggregate 529 plan limits range from $235,000 to $550,000.

For example, married grandparents in New York who want to fully fund a grandchild’s 529 plan may contribute a lump sum of $520,000. The first $32,000 of the 529 plan contribution will qualify for the annual gift tax exclusion, and the remaining $488,000 must be reported on IRS Form 709 and will count against their lifetime exemption. (There are no joint gift tax returns, so each grandparent will have to file separately).

Maximum 529 Plan Contribution in New York
Annual Gift Tax Exclusion
Remaining Balance Reported on IRS Form 709
Lifetime Gift Tax Exemption
$12.06 million x 2 = $24.12 million
Remaining Lifetime Gift Tax Exemption
$22.8 million – $488,000 = $22.312 million

A good place to start:

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