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The Healing Wallet
A weekly blog focusing on financial guidance to help you manage wealth, advance your career, and integrate your faith.
Presented by Integritas Wealth Strategies
By Daniel Heidel
Issue No. 1
529 Plan Superfunding: Tax-Smart Education Gifting for Medical Families
Fund your grandchild’s medical school education in one tax-efficient move.
Picture this: your grandchild just took their first steps, and you’re already envisioning them in a white coat, stethoscope around their neck, making a difference in the world. But with medical school costs soaring past $300,000 for a four-year program, how can you ensure their dreams don’t become a financial nightmare? The answer lies in a powerful yet underutilized strategy called 529 plan superfunding—a tax-smart approach that allows you to front-load education savings while maximizing your gift tax benefits.
Understanding 529 Plan Fundamentals
Before diving into superfunding strategies, let’s establish the foundation. A 529 education savings plan is a tax-advantaged investment account designed specifically for education expenses. Contributions grow tax-free, and withdrawals for qualified education expenses—including tuition, fees, books, room and board, and even certain K-12 expenses—are completely tax-free at the federal level.
For medical families, 529 plans offer unique advantages. They cover not just undergraduate expenses but also graduate and professional school costs, making them perfect for funding that future doctor’s extensive educational journey. Unlike other education savings vehicles, 529 plans have no income limits for contributors and offer high contribution limits—many states allow total contributions exceeding $400,000 per beneficiary.
The Superfunding Strategy: Maximizing Your $85,000 Opportunity
Here’s where the magic happens. Normally, you can gift up to $18,000 per year to any individual without triggering gift tax consequences (for 2024). However, 529 plans offer a special provision that allows you to contribute up to five years’ worth of annual exclusions in a single year—that’s $90,000 for 2024 ($18,000 × 5 years).
This “superfunding” strategy, combined with the five-year annual exclusion election, allows grandparents to make a substantial lump-sum contribution while spreading the gift tax impact over five years. For a married couple, this means they could contribute up to $180,000 to a grandchild’s 529 plan in one year without any gift tax implications.
The beauty of this approach extends beyond tax efficiency. By investing a large sum early, you harness the power of compound growth over a longer time horizon. A $90,000 contribution when your grandchild is born, assuming a 7% annual return, could grow to over $400,000 by the time they’re ready for medical school at age 22.
State Tax Deduction Maximization
While focusing on federal tax benefits, don’t overlook state tax advantages. Many states offer tax deductions or credits for 529 plan contributions. The key is understanding your state’s specific rules and maximizing these benefits.
For instance, New York offers a deduction of up to $10,000 per beneficiary for married couples filing jointly. Some states, like Arizona and Montana, offer particularly generous deduction limits that can significantly reduce your state tax burden.
However, many states require you to use their specific 529 plan to claim deductions. This creates a strategic decision point: choose your state’s plan for immediate tax benefits or select a superior out-of-state plan for better investment options and lower fees.
Investment Allocation Strategies for Long-Term Growth
With potentially two decades until your grandchild enters medical school, your investment allocation strategy becomes crucial. For young beneficiaries, an aggressive growth allocation—perhaps 80-90% equity exposure—may make sense given the long time horizon and the potential ability to weather market volatility.
Many 529 plans offer age-based investment options that automatically become more conservative as the beneficiary approaches college age. These “glide path” strategies can simplify investment management while ensuring appropriate risk levels throughout different life stages.
For medical families planning for extended education periods, consider that your investment horizon extends beyond undergraduate studies. Medical school typically begins around age 22, meaning you have additional time for growth-oriented investments even after undergraduate expenses begin.
Grandparent vs. Parent Ownership: Strategic Considerations
The decision of whether grandparents or parents should own the 529 plan involves several important factors. Grandparent-owned plans don’t count as parental assets on the Free Application for Federal Student Aid (FAFSA), potentially improving financial aid eligibility.
One sophisticated strategy involves grandparents contributing to parent-owned plans, capturing the best of both worlds—parental ownership for FAFSA purposes and grandparent funding for wealth transfer benefits. Alternatively, grandparents can time distributions from their own plans for the student’s final years when FAFSA impact is minimized.
Professional School Cost Projections and Planning
Medical school expenses have consistently outpaced inflation, making accurate cost projections essential for adequate planning. Today’s average medical school costs range from $250,000 to $400,000 for a four-year program, depending on whether it’s public or private. Factoring in inflation, these costs could easily exceed $500,000 by the time today’s newborn reaches medical school.
Beyond tuition, consider additional expenses like MCAT preparation, medical licensing exams, residency-related costs, and living expenses during the extended educational period. A comprehensive approach to 529 planning accounts for these ancillary costs to ensure adequate funding.
Multiple Beneficiary Strategies
For families with multiple children or grandchildren, 529 plans offer remarkable flexibility. You can change beneficiaries within the same family, allowing unused funds from one child to benefit another. This flexibility is particularly valuable for medical families where educational paths may vary among siblings.
Consider establishing separate plans for each child while maintaining the ability to reallocate funds as needed. This approach provides both targeted planning and strategic flexibility as your family’s educational needs evolve.
State Plan Selection Criteria
With over 50 different 529 plans available, selecting the right one requires careful analysis. Key factors include investment options, fees, performance history, and state tax benefits. Some plans offer superior investment lineups with low-cost index funds, while others provide unique features like principal protection or guaranteed return options.
Don’t automatically choose your home state’s plan. If your state offers minimal tax benefits, you might achieve better long-term results with a high-quality out-of-state plan featuring lower fees and superior investment options.
A Biblical Perspective on Education Investment
“Train up a child in the way he should go, and when he is old he will not depart from it” (Proverbs 22:6). This wisdom speaks to the eternal value of education and preparation. As stewards of our resources, investing in education—particularly in fields like medicine that serve others—aligns with biblical principles of wise stewardship and loving service.
The concept of leaving an inheritance to “children’s children” (Proverbs 13:22) supports the multi-generational thinking inherent in 529 superfunding strategies. By planning ahead and investing wisely, we’re not just funding education—we’re enabling future generations to serve others more effectively.
Rollover Rules and Flexibility
Recent legislative changes have enhanced 529 plan flexibility. Starting in 2024, unused 529 funds can be rolled over to Roth IRAs under certain conditions, providing additional options for surplus funds. This change reduces the “what if” concerns about overfunding education accounts.
529 plans also allow beneficiary changes among family members, including cousins, aunts, uncles, and even the original account owner. This flexibility ensures that your educational investment can adapt to changing family circumstances and educational goals.
Tax-Free Distribution Planning
The culmination of your 529 superfunding strategy lies in tax-free distribution planning. Qualified education expenses include tuition, fees, books, supplies, equipment, and reasonable room and board costs. For medical students, this extends to expenses like medical equipment, clinical rotations, and even certain licensing fees.
Careful record-keeping becomes essential to maximize tax-free distributions. Maintain detailed records of all educational expenses and coordinate 529 distributions with other education tax benefits like the American Opportunity Tax Credit to optimize your overall tax strategy.
Taking Action: Your Next Steps
529 plan superfunding represents a powerful strategy for medical families serious about education funding. The combination of tax-free growth, generous gift tax treatment, and flexible usage rules makes it an ideal vehicle for long-term education planning.
Ready to explore how 529 superfunding can secure your family’s educational future? Contact me today to discuss your personalized education funding strategy and take the first step toward making your grandchild’s medical school dreams a financial reality.
Updates & Announcements
New Additions
My vision for Integritas is to always continue to derive greater value for clients and provide it with true Integritas (Integrity). Below are some recent additions to service offerings!
- Trust & Will: Clients can now receive a will and trust as part of their estate planning package, included in their financial planning fee.
- Announcement: Be on the lookout for some exciting additions to come! You won’t want to miss them.
Daniel Heidel
Integritas Wealth Strategies, LLC
The information contained in this newsletter is purely for education purposes and should not be construed as financial advice. You should consult your tax advisor and attorney for any specific advice and recommendations relating to your situation.
