Like many of you, Colleen and I have children who we hope to send to college. And like some of you, we have a significant amount of liquid cash and investments. Mathematically, it would probably make a lot of sense to front-load the 529 plans for our two girls, or at least one of them.
Here’s how it works: The 529 plan (or Qualified Tuition Program in IRS-speak) has a little known and less used five-year, front-loading option. With this option, you can put up to five years of gift-tax-exempt funds into your 529. The current gift tax exemption is $14,000, so this allows you to deposit $70,000 per parent or $140,000 total. Given that the funds in a 529 grow tax-deferred if used for education purposes, this is a pretty powerful tool.
If a $70,000 contribution grows at a modest 5% annually, you will have just over $168,000 in your account come time for college. For comparison purposes: Full freight at Harvard University currently costs more than $58,000 per year for tuition and fees, and the average state school costs more than $21,000 per year for out-of-state students. With a single contribution, you could send your child to virtually any school they chose in 18 years.
Despite these powerful benefits, I don’t know anyone who has taken advantage of the lump-sum option. Here are the reasons I think people shy away from it:
Logically, I know that most financial aid goes to the neediest students and the “best” students. That leaves average students of above-average income more likely to shoulder the burden by themselves. This is where many of us will fall. That means we could benefit by using the lump-sum contribution option.
But we probably won’t. Sometimes it’s not about the odds. Chalk this one up to the all too common foible of hope over experience.
Brian McCann, CFP®
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