Summary/TL;DR
529 Saving Plans are state sponsored programs that offer tax-advantaged savings for college education. When the beneficiary of the plan goes to college, the funds may be distributed tax-free to pay for qualified educational expenses. Whatever is remaining may be rolled over into a Roth IRA (up to a $35,000 lifetime maximum) or rolled over into other 529s for additional beneficiaries. When a 529 Savings Plan is “superfunded”, it can provide multiple generations worth of tax-free education and retirement savings for one’s heirs.
Introduction
In today’s post, we’ll discuss how a relatively modest sum of $190,000 can be invested into a 529 Savings Plan to create a tax-free legacy for your heirs.
“Superfunding” A 529
First, consider that all contributions made to a 529 are considered gifts for tax purposes. This means that any amount contributed to a 529 over the annual exclusion ($19,000 in 2025) would be subject to gift-tax. Fortunately, 529 Savings Plans have a special rule that allows account holders to make a lump sum contribution and pro-rate their annual gift tax exclusion on the contribution over 5 years. In 2025, with an $19,000 annual exclusion, this means an individual could make a maximum lump sum contribution of $95,000 ($190,000 for married couples) without incurring gift-tax consequences as long as no additional contributions are made to the 529 for the next 5 years. This strategy is known as “superfunding” a 529.
If superfunding is done early enough in a child’s life, the 529 will grow to an amount that could be sustained in perpetuity. For example, a 529 that is maximally superfunded by a married couple in 2025 will be worth over $1,000,000 in 18 years assuming a 10% annual rate of return. And all of this is tax-free as long as the funds are used for “qualified education expenses” or are rolled over to a Roth IRA (discussed below).
It’s very rare that a single individual would need a sum this large to complete a college degree, so what is your child or grandchild supposed to do with these leftover funds? Two things: 1) they can rollover a large sum to a Roth IRA for a jump-start on their retirement savings, and 2) they can rollover whatever remains into 529 Savings Plans for their own children for the cycle to repeat. We’ll discuss both of these next steps in detail next.
The 529-To-Roth Rollover
Thanks to the SECURE Act 2.0, leftover funds in a 529 Savings Plan may be transferred to a Roth IRA in the name of the 529 beneficiary up to a lifetime limit of $35,000. There are a couple of very stringent rules, however, that must be followed for this to be allowed. First, the 529 plan must have been held in the beneficiary’s name for at least 15 years. Second, any rollover to a Roth IRA from a 529 will be subject to the annual Roth IRA contribution limits (currently $7,000 for individuals under the age of 50). In other words, 529 owners are only allowed to rollover $7,000 per year to a Roth IRA up to a lifetime limit of $35,000, meaning that it would currently take 5 years for the limit to be reached. Finally, any contributions made to the 529 from within the past 5 years are not eligible for a Roth rollover.
If you contributed $7,000 annually for 5 years to a Roth IRA for a 22-year-old, it would be worth about $1,200,000 by the time they are 60, assuming a 10% annual growth rate and no additional contributions.
Putting It All Together – The Dynasty 529
An early-superfunded 529 has become known as a “Dynasty 529” because it can be used to pay for the college education of grandchildren, great-grandchildren, great-great grandchildren, and so-on with essentially no end in sight. Let’s look at a detailed example to see how impactful this would be.
Assume Jim and Pam superfund a 529 Savings Plan for their daughter, Cecelia, as soon as she’s born with a lump-sum contribution of $190,000. If it’s invested aggressively and earns an average 10% rate of return for the next 18 years, it will be worth about $1,000,000 by the time Cecelia is ready to go to college at 18.
At the time of this writing, the average cost of college in the United States is $38,270 per year and has grown at a rate or 4.04% annually in the 21st century. Assuming this same growth rate, it will cost Cecelia $78,066 to attend her first year of college, $81,220 in her second year, $84,502 in her third year, and $87,916 in her fourth year if she receives no scholarships. Assuming a lower growth rate of 6% for the time she’s in school, Cecelia will have $950,233 left in her 529 by the time she graduates at age 22.
Now, assume she lands a job soon after graduation (age 23) and contributes the maximum of $7,000 to a Roth IRA from her 529 for the next 5 years (the contribution limit will likely be much higher than this by this time as well). At the end of 5 years, assuming an aggressive 10% return, she will have $1,483,350 left in her 529 and $47,009 saved in her Roth IRA. By the time she can begin distributing from her Roth IRA tax- and penalty-free around age 60, it will be worth $1,200,977 assuming no additional contributions are made!
At the end of the 5-year period covered above, let’s assume Cecelia is married and plans on having 4 children. If she splits what’s currently left in her 529 Savings Plan from her parents 4 ways, she could open a 529 for each of her future children and rollover $370,838 into each of them as they’re born! 18 years later, when those children are ready to go to school, they will have $2,061,829 in each 529 to repeat the cycle for as long as funds remain.
At this point, you should get the picture. This single decision could be so powerful that no one in your family would ever have to pay for college again and would receive a massive jump-start to their retirement savings. And no one will pay a single dime in taxes along the way because 529s and Roth IRAs are tax-free vehicles! Your $190,000 investment, in other words, will have grown into multiple generations worth of college and retirement savings for your heirs. People in your bloodline born decades after you pass away could still be benefiting from your legacy, and millions in taxes will have been saved.
Don’t Try This At Home
Nothing like this should ever be pursued without the assistance of qualified professionals including a financial planner, CPA, and estate planning attorney. If this interests you, reach out and schedule a meeting with me to discuss how I can help!
