Should You Make a Lump-Sum 529 Contribution or Spread It Out for College?

Paying for college can be a very tricky process, and with the changing landscape of college financial aid every year, things are looking a bit grim for many families out there trying their hardest to make sure that their kids make it through, graduate, and live a great life from the education they got from college.

When we talk about what it means to help pay for your kids' and grandkids’ college, there are many questions you’ll want to ask yourself to better understand the right steps to take. 

Should you make a lump-sum 529 contribution to it, or should you spread it out more into the future as the years go by in their college life? These are questions we want to answer for you and educate you on, to provide you with the best information to make an informed decision. 

In this blog, we will run through whether you should make a lump-sum 529 contribution, spread it out, and discuss how other ideas can affect how you pay for your kids' college experience.

What is a 529 Plan and How Does it Work?

As the IRS defines it, a 529 is a plan with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training, or for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school for a designated beneficiary, such as a child or grandchild. 

This plan comes with several advantages, namely allowing the account owner to maintain ownership of the account until the money is withdrawn. The tax advantages are what make this plan stand out from other college financial plans. If the money inside your 529 plan is never withdrawn or transferred, you will not receive any form of income tax on your earnings. The money can be used and even avoid any form of state tax, as long as it’s used to help pay for education.

This type of college financing plan has been around for a long time now, and yes, anyone is allowed to sign up for it. Even if you’re the person contributing money or the one receiving the benefits, you won’t receive any income restrictions, and you can set up as many 529 plans as you want under your name. As long as you’re a US citizen, over the age of 18, have a mailing and legal address, and a Social Security number or Tax ID, then you’re all set.

How to Best Approach a 529 Plan for Your Grandkids

So now that you have an idea of how this works, let's talk about what the best approach is to planning it out for your grandkids, whether or not you should make a lump-sum contribution or spread it out more. You can do either one of those options as long as you understand what comes with both of them.

Making a Lump-Sum Contribution

Let's start with making a lump-sum contribution! If you’re the kind of person who studies the financial markets and how things are changing concerning college financial aid, making an immediate contribution could help you more. This allows you to grow better over time and extend the number of years you have to make sure that tuition is taken in at a lower rate. If you are someone who has a lot of money ready to use for a plan like this with immediate contribution, that’s also another benefit.

Spacing Out Your Money and Waiting

The most important thing to outline for why waiting and spacing out your money works wonders is that when you’re actually ready to use the money to help pay for college finances, the timing is going to matter more than anything, and so sometimes it benefits you to wait long enough. If your grandkid is starting college during a time when it’s not great for the market, holding off for a few years would allow your 529 plan to increase its value before you use the money.

Essentially, both a lump-sum contribution and spacing out your money have their pros to them. Contributing early with a lump sum can help with taking in those tax incentives and making sure your savings have more room to grow. Spacing it all out can be the more strategic path for you if you want to take advantage of the markets and when the economy is not doing well, and your college plan for paying out can still work.

The best way to judge if either of these two decisions works best for you is by reaching out to us for a second opinion. It’s our job to help you in case you do need that second opinion, and if you think one decision is right over the other. We work with countless resources around college financial aid, and we can’t recommend enough that you read our College Money Talk page, which will fill you in on what the process is like. Fill out our contact form, and reach out to us when you’re ready. We can’t wait to help!

College Financial Aid and 529 Plan FAQ

Is it better to make a lump-sum contribution to a 529 plan or spread out the money over time?

• A lump-sum contribution can help maximize tax-free growth if the markets perform well 

• Spacing out your money over time can reduce risk and preserve flexibility for families balancing other financial priorities

The better choice usually depends on your financial stability, keeping up with the market, having state tax benefits, and other factors around the college you attend. For many families, a blended approach with an initial contribution and adding to it regularly over time can offer a more practical balance between growth potential and flexibility.