A 529 plan is designed to pay for future education costs, usually for a child or grandchild. With the new tax law, 529s can now be used for K-12 education costs, as well as certain college costs. Front-loading a 529 plan allows earnings to be compounded on more money over a longer period of time.
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Contributions grow tax free and can be withdrawn tax free, provided the money is used for qualified educational expenses.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.
The ability to start a 529 plan, front-load it, and, at the same time, eliminate that amount from potential estate taxes, can be a real benefit. It's also a very wise use for a large bonus or inheritance, if you happen to have one come your way.
Reference: Investopedia (December 22, 2017) “Why You Should Front-Load Your 529 Plan”
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