Author Topic: Contributing In Excess Of $14k To Kid's 529 Plans-"Supercharging" Contributions  (Read 3061 times)

mr_orange

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We have some lumpy business income coming in next year and I have read that you can pre-fund 5 years' worth of 529 contributions if you so-choose.  If this is accurate it would be helpful for us to give the money extra time to grow during the run-up to college for the little ones.  My oldest will be 6 in January and our twins will each be 3 in January. 

Questions:

1.  Can I pre-fund multiple years of 529 contributions?  If so, is there some special procedure I need to use with the custodian for the plan?
2.  Is there anything else I can use to make contributions to the plan like gifts, etc.? 

If there are other exotic strategies please enlighten me as well.  The goal is to get around $100k in each of their accounts and they currently have $24k (oldest), $14k, and $14k.  My plan for next year was to contribute the full $14k/kid, but getting to a bigger number should be doable with a lot of property selling into a hot market in Austin.  Many of the articles I found focus on reducing estate, etc.  This isn't really a consideration for me.  We're just trying to get dough into the tax-advantaged accounts asap to give them more time to grow. 

Thoughts, guidance, and feedback on the overall approach is helpful and welcome. 

DaveR

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It's $14k for you, $14k for your wife, so $28k per kid. And grandparents can gift $28k too (per kid per couple)... and nothing says you can't gift some money to your parents.

As long as neither you or your wife have taken the 5 year election, you should be able to dump 14k * 5 * 2 = 140k per kid into their 529s. You'll need to file IRS Form 709.

mr_orange

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It's $14k for you, $14k for your wife, so $28k per kid. And grandparents can gift $28k too (per kid per couple)... and nothing says you can't gift some money to your parents.

As long as neither you or your wife have taken the 5 year election, you should be able to dump 14k * 5 * 2 = 140k per kid into their 529s. You'll need to file IRS Form 709.

I'll check out Form 709.  Thanks for pointing me to it. 

If I understand this correctly this approach seems far superior to the 5-year option.  Procedure:

1.  Contribute $14k/kid to the 529 plan
2.  Contribute $14k/parent and $14k/grandparent to 529 and later change the beneficiary to the appropriate kid.  If necessary gift money to grandparents so they aren't out the dough

Using this procedure you'd get the same effect as you would using the 5-year rule:

-$14k for the kid in the applicable tax year
-$14k from mom
-$14k from dad
-$14k from grandma
-$14k from grandpa

So that still totals $70k and you don't have to defer your contributions for 5 years if for whatever reason you wanted to throw more in the next year. 

Accurate?

This, of course, begs the question about where it ends.  What's to keep you from using the same procedure from great grandparents, family friends, business partners, or whoever else?  There has to be a logical end to this.  Right?

Another question is what could you do with the money if the accounts end up being over-funded after the kid finishes their education?  What all can the funds be used for without tax penalties? 

Dee18

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My father did this for my daughter (his only grandchild).  He passed away seven years ago.  My daughter started college this year.  Her tuition is covered by scholarships, but the 529 covers everything else including "luxuries" like traveling in Jan term, joining a sorority, paying her car insurance.  I am grateful every day for his forethought. There will even be money left over when she graduates.
(To be clear, the 529 money used for the luxuries is reported as income to my daughter because those are not qualified expenses.  But there is no penalty for taking out those funds if you receive scholarships.)

DaveR

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If I understand this correctly this approach seems far superior to the 5-year option.  Procedure:

1.  Contribute $14k/kid to the 529 plan
2.  Contribute $14k/parent and $14k/grandparent to 529 and later change the beneficiary to the appropriate kid.  If necessary gift money to grandparents so they aren't out the dough

Using this procedure you'd get the same effect as you would using the 5-year rule:

-$14k for the kid in the applicable tax year
-$14k from mom
-$14k from dad
-$14k from grandma
-$14k from grandpa

So that still totals $70k and you don't have to defer your contributions for 5 years if for whatever reason you wanted to throw more in the next year. 

Accurate?

This, of course, begs the question about where it ends.  What's to keep you from using the same procedure from great grandparents, family friends, business partners, or whoever else?  There has to be a logical end to this.  Right?

Another question is what could you do with the money if the accounts end up being over-funded after the kid finishes their education?  What all can the funds be used for without tax penalties?

Just so we aren't crossing wires...You are able to gift $14k to as many individuals as you want, so:

Dad: $14k for kid 1, $14k for kid 2, $14k for kid 3. So, $42k to your kids
Mom: $14k for kid 1, $14k for kid 2, $14k for kid 3. So, $42k to your kids
That gets you $84k just with mom and dad

Grandma can toss in $42k, Grandpa can add $42k, uncles, aunts, etc. If the kids happen to have assets, they can contribute to their own 529 and to their siblings. You can easily shovel a ton of money into 529s. It ends at $300k per 529 (which is the max investment).

And the money coming out (tax free) just needs to be qualified education expenses: tuition, fees, books, room, board. Undergrad, grad, switch beneficiaries to a sibling, cousin, future grandkids, or even some classes for yourself. If the kids get a bunch of scholarships, then you can take similar amount out, penalty free. Lots of flexibility.