Reason 1: Tax benefits
Contributions to a 529 plan are considered gifts for tax purposes. For 2019 (and 2020), contributions of up to $15,000 per individual qualify for the annual gift tax exclusion. What’s more, you can gift as much as $75,000 to a 529 plan if the contribution is treated as if it were spread over a five-year period. Couples can gift $30,000 a year, or $150,000 using the five-year election option. Note: The amount contributed must be reported on IRS Form 709 for each of the five years.
Reason 2: Estate tax benefits
Contributing a lump sum to a 529 account will allow you to transfer a large amount of assets from your estate while retaining control of the funds in the account. In 2019, individuals have a lifetime exclusion of $11.4 million. That means you can gift or remove that amount without having to pay federal estate or gift tax. For 2020, that amount increases to $11.58 million. Note: If you change your mind and revoke the funds in the account, they’ll be added back to your taxable estate. There is no joint gift tax return, so you and your spouse will each have to file separately.
Reason 3: Extending the gift to future generations
A gift to a 529 account may be the gift that keeps on giving. Let’s say that you decide to make contributions to your child’s 529 college savings plan. If there are any funds left over when that child is finished with school, you can simply switch the account over to the next child, or even grandchild. The account will continue to grow tax deferred and, if the distributions are used for qualified educational expenses, they can be used tax free.1
Be sure to check with your tax advisor, estate planning attorney, and/or financial professional before investing.
1 Federal gift, state gift, and estate tax laws may vary and additional taxes, including the generation-skipping tax, may apply to you or your beneficiary. State tax laws and treatment may vary. Earnings on nonqualified distributions are subject to federal and applicable state income taxes and a 10% federal penalty tax. Please consult your tax advisor for more information.