Skip to content

Front-Load Your 529 Plan to Boost Its Power

MP900407458Like any other savings program that takes place over an extended time period, if your budget permits, stashing a good amount of cash early on into your 529 college savings fund could be a game-changer.

College savings plans, known as 529s, were created to help parents and grandparents put money away for future education costs. One of the changes in the new tax law was to allow 529 funds to pay for K-12 education costs, in addition to qualified college costs. Front-loading a 529 plan and starting to build it as early as possible in the child’s life, will give earnings more growth potential.

Investopedia’s recent article, “Why You Should Front-Load Your 529 Plan,” reminds us that the total amount you can contribute to a single 529 plan is set by the state in which the plan is established. Your contribution is deposited after taxes, so there’s no federal tax deduction. Some states, however, give a deduction for some of your contribution.

Contributions grow tax free and can be withdrawn tax free, provided the money is used for qualified educational expenses. But there can be gift tax consequences, if you exceed the annual gift tax limit–$15,000 per child or grandchild ($30,000 for spouses who give jointly) in 2018. You can avoid this by using an IRS rule that lets you front-load a 529 plan for up to five years at one time with no gift tax consequences. You can’t make additional contributions (or take money out) until the five years are up, at which time you can contribute another $75,000 for the next five years, if you want. If you and your spouse both contribute (and file jointly), the total amount can be as much as $150,000 in 2018 for each five-year period.

The advantage of front loading becomes clear when you compare the savings outcome with regular annual contributions.

A realistic look at the future cost of college for your child or grandchild shows the importance of leveraging every dollar of earnings in your 529 plan. By 2034, one year at a public university will cost $47,045, and the average one-year cost of a private school will be $105,071, according to J.P. Morgan. Those costs translate to $188,180 for a four-year degree from a public school and $420,284 for four years at a private institution.

You must be pretty well-off to afford the large amount needed to front-load a 529 education savings plan. However, some grandparents are in that position. Front-loading a 529 plan can be a good way to put a dent in their taxable estate.

Reference: Investopedia (December 22, 2017) “Why You Should Front-Load Your 529 Plan”