Superfund 529? When does that make sense?

[jjones1438]

I live in a state that allows you to deduct $8K per person or $16K if MFJ per year in state income taxes (I think the example said this would save you around $900 or so) based on some assumptions.

I have seen threads of others "Superfunding" (dumping a LARGE amount, say $50K or $100K all at once) into their 529 and this appears to be most common in states that do NOT offer any sort of deduction for the contribution.

If you live in a state like I do that DOES allow the deduction, is there any reason you would want to superfund the 529 that I am not considering? For sake of example, say I want to contribute around $100K, let's say $96K to keep it simple.

Option 1 - contribute $16K per year for 6 years and get the state deduction each year.

Option 2 - Superfund this $96K contribution in a shorter time horizon.

It seems like Option 1 makes sense, unless I am missing something?

[seattlecyclone]

I think the comparison would be to look at what happens if you contribute all at once vs. a little bit each year. Contributing all at once you lose the state tax deduction in future years, but you also lose the obligation to pay capital gains tax on the growth in the intervening time. The more generous the state tax credit, the more likely it is for the gradual contribution approach to be better.

[reeshau]

I agree with @seattlecyclone.  Where is this money coming from?  How many years are you saving?

In your case, I see option 2 coming out ahead in 6 years by about $20k, with the following assumptions:

1) Withdrawals coming from taxable investments (assuming 15% LTCG tax on contributions in each case)
2) 10% nominal returns (100% stock allocation, long term average)

The breakeven is longer if returns are lower, but remains positive if nominal returns are above 5%.  The longer term you are considering, the more likely that is to be true.

The breakeven period is the same if I assume contributions come from income (assuming 22% bracket) but year 6 is only $13k ahead.

[Just_Me]

Reading "shorter time horizon" i didn't think all contributions go in at once like in one tax year with one funding event. If your shorter time horizon is 15 months you can stretch that over three tax years.

If your horizon for spending these funds is 6 years or less that also changes the asset allocation for the 529 funds and lowers growth potential.