By Eric Reich
It is not uncommon for clients to come in who have assets that will clearly exceed their usefulness to them during their remaining lifetime. Sometimes, there is a fear of just handing over a large amount of assets to the next few generations that did little to nothing to earn that money. It isn’t a secret that sometimes money inherited doesn’t hold the same meaning or isn’t treated with the same level of responsibility as money that you have had to go out and earn. While there are several ways to protect that money from the potential of being squandered away, this week, I want to focus on one particular strategy that seems to resonate with clients due to its usefulness. We all want the money that we leave behind to make a real impact on the lives of our heirs. I believe that one of the best ways to ensure your heirs, even those for generations to come, put the money to good use is to “superfund” 529 college savings plans.
First, what is a 529 college savings plan? A 529 college savings plan (the IRS code that created them) allows money to be invested for the purpose of saving for college, technical school, and with a few restrictions, even private primary and high school. The best part is that funds withdrawn from these accounts can be completely tax-free when used for qualified expenses, things like tuition, room/board, books, computers, etc. This includes the growth of the principal, interest, and dividends. All can be tax-free when used correctly. Recent laws have made a 529 plan even better now that unused 529 funds under the right circumstances can even be rolled over to a Roth IRA and still remain tax-free. If this is starting to sound really appealing, just wait, it gets so much better. A 529 college savings plan can be “superfunded”, and the excess can also be used to fund college, trade school, and private school, for generations to come.
Why is this so important? College expenses are assumed to average $118,000 for a child born today who attends a public in-state school. If you’re considering a private school that number is estimated to jump to a staggering $625,000 assuming costs continue to increase at the current 5% annual rate. It sounds unbelievable, right? Well, that’s been the historical average for 20+ years now.
The normal maximum allowable amount that you can put into a 529 plan in any given year is currently $18,000 per person in 2024. A married couple can double that amount to $36,000 per year per beneficiary. Superfunding comes into play due to a special rule that allows you (and your spouse) to make 5 years’ worth of gifts in a single year! That equates to $180,000 in gifts in a single year, and better yet, for a newborn beneficiary, that money now has potentially 18+ years to grow while invested! The catch, however, is that you can’t make any more gifts for the next 5 years. After 5 years from the date of the original gift, you can make another 5 years’ worth of gifts at the then allowable annual gift limit times five. Many 529 plans limit the overall amount you can contribute to a plan, so you’ll want to check with both your 529 plan provider as well as your CPA.
If your beneficiary receives a scholarship, attends a U.S. Military Academy, dies, or becomes disabled, funds can be withdrawn with only the earnings being taxable. If the beneficiary doesn’t use all of the funds inside a superfunded account, it can be rolled up to the limit to a Roth IRA or named to a new beneficiary, both of which may be tax-free! Even better still, that money is out of your estate for asset and estate tax protection, but you still get to control it.
I have seen multimillion-dollar 529 plans that could potentially fund education expenses for decades to come. Superfunding 529 plans allows for a potential measure of control of the way the future assets are spent. It also provides a meaningful use of the inherited assets and could provide potential tax and asset protection for you. It’s easy to see why this strategy may make sense for clients who won’t likely ever need the extra money that they can contribute to this type of plan.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
