Superfunding 529 Plans: Rules, Pros & Cons

This article was written to help you answer the question: Should I superfund my 529 plan? 

First, let’s start with the basics. 

What is a 529 plan? 

With colleges and universities becoming more necessary in today’s world, but with tuition prices on the rise across the country, the 529 plan is something you should consider looking into if you haven’t already. 

529 plans are part of the Taxpayer Relief Act of 1997. It essentially allows you to contribute money to a fund in the name of your child or grandchild. The growth and withdrawal of the funds are tax-free unless they are not used for qualified educational expenses. Qualified costs include expenses such as tuition, books, room, and board, etc. Not all expenses are eligible in the 529 plans, for example, parking costs are generally considered a luxury item, and not eligible for withdrawal without a fee.

Different plans have different restrictions, but all of them offer the same principle: investing in your children’s education whilst maximizing tax breaks.

You may have also heard about ESA’s or Education Savings Accounts. This is a very similar style of fund but has a few more restrictions, such as an individual gross income of less than $110,000, and a maximum contribution of $2,000 per year.

Okay, so where does superfunding come into it?

Superfunding a 529 plan is essentially claiming your gift-tax allowances for the next few years, today. The law allows you to contribute a lump sum today, and spread it out over 5 years, taking maximum advantage of the $15,000 annual gift-tax exemption.

Whilst you can contribute to a 529 plan gift-tax-free, anything above the $15,000 per year will start to eat into your lifetime allowance of $11.7 million (2021). This might seem like a lot, but only a couple of years ago, this allowance was $1 million. Things change rapidly as new presidents come to office, so we cannot assume that the allowance will stay so high in the near future. 

How does it work? 

Superfunding is only for people who have excess income at their disposal. This is not something you should do if you need the money for your current lifestyle or even your retirement. If you do have the money for it, however, and you want to superfund a 529 college savings plan, you can put 5 years’ worth of contributions in a single year. 

For example, you may have $50,000 in spare cash that you would like to invest. Instead of having to stick below the $15,000 gift-tax limit, you can superfund a 529 plan and deposit the entire $50,000 in one year. The money will then get split over 5 years, so in the eyes of the IRS, you will have contributed $10,000 per year. $5,000 below the limit. 

Here’s another example to think about:

You want to gift $65,000 to your child, through a 529 plan. Whilst setting one up, you gift $10,000 to that child through another plan or policy. You’d expect to be able to apply $5,000 of this to your gift today, and split the remaining $60,000 across the next four years. However, this is not the case. The $65,000 will be treated as a $13,000 gift per year, thus this first year you would end up gifting $23,000, $8,000 above the tax exemption

Are there any limits? 

Yes, there are. 

State administrators put total contribution limits on how much you can have in your fund. It is usually quite high, somewhere between $200,000 – $500,000 depending on your state. It is important to note here that due to the restrictions on withdrawals, you probably wouldn’t want any more than that in this specific fund anyway. 

There is also a “soft limit” of $75,000 per superfund. You can, technically, contribute more, but anything over the $75k will not be eligible for the gift-tax exclusion, and therefore you’ll need to file a gift-tax return. You won’t need to pay any taxes on this (unless you go over your lifetime contribution of $11.7 million (2021)).

What are the rules surrounding the 529 plan and superfunding? 

  • You do not need to contribute to a fund in your state if you do not want to. You can choose a different state that perhaps has lower fees, better rates, more desired colleges, etc.  
  • Once you’ve elected into the 5-year superfunded plan, it will apply to all of the money you contribute. You wouldn’t be able, for example, to give $60,000 and only pro-rate $55,000. 
  • What you can do, however, is make more than one election throughout the 5 years. Whilst the IRS hasn’t specifically announced this, there is no law saying it cannot be done. What this means is that you can contribute an amount spread over 5 years, and then in 2 years donate another amount, and spread that over 5 years. For years 2-5, you’ll have the breakdown from year one and year two added together to get your total contribution. 
  • You can “gift-split” with your spouse, meaning you and your partner can contribute up to $30,000 per year ($15,000 each) (or a lump sum of $150,000 into 529 plans).

Each specific plan then has different rules, rates, and allowances. Be sure to take a look at the fine print and fully understand how this specific plan works, what it will cost you in fees, and exactly what it is allowed to be used for. 

What are the benefits of superfunding 529 plans? 

Surpass the annual gift-tax limit

You can surpass the annual limit for funding a regular 529, without counting towards your lifetime estate and gift tax exemption. For married couples, this is up to $30,000 ($15,000 each).

More time to grow

A super funded contribution gives a higher principal investment more time to grow. The earlier you can start investing, the larger the pot will be when the child needs to take out the money. This Forbes article suggests starting to invest 10 or more years before your child or grandchild starts college. 

State tax credits/deductions

Many states offer a state tax credit or a state tax deduction, so you can claim tax off the amounts you have invested in your 529 plans. 

No time limits

There is no limit on when your child needs to use their fund, so if they decide to work before University, or even get a scholarship for their Undergraduate but then need the money for their Post-graduate, they can use the contributions. All this time, your investment will be earning money.

Flexibility with Beneficiaries

If you fund your child’s 529 plan and they receive a full scholarship to their university of choice, you can change the beneficiary of the 529 plan to another child or person and still receive the same savings benefits.

What are the drawbacks of superfunding 529 plans? 

Missing out on other investments

You could potentially miss out on other investments. If you put all of your money into a 529 plan, you may neglect your retirement fund, for example. Before superfunding a plan, ensure you have the means to do so.

Potential withdrawal penalties

If your child does not go to college, or receives a scholarship and does not need the money, whomever then withdraws the funds would have to pay tax on this, and sometimes a penalty is incurred, usually around 10%.

This, however, is relatively easy to bypass if you have another child or grandchild who could benefit from this plan, as most plans are quite easy to move between beneficiaries. You can even make yourself the beneficiary!

Ineligibility for state tax credits

In some states, superfunding a 529 makes you ineligible for state tax credits. 

Contributing too much

You could contribute too much to your 529 plan. As withdrawals are specific, you need to make sure that all of the money is actually needed for higher education so you or your beneficiary don’t incur fees and tax for no reason.


Overall, the 529 plan is a very useful tool if you want to fund the education of your children or any beneficiary tax-free and offers flexibility not available in other tax-saving strategies. While superfunding a 529 plan can be a wise choice if you have the means to do so, it is also important to weigh the pros and cons to decide if it will help you meet your financial goals. If you are interested in learning more, set up a free tax discovery session, and we will be happy to help you decide if this is a good tax strategy for your situation.