A grandparents’ guide to 529 plan gifting
You don’t have to wait until the holidays or their birthdays to give your grandchildren something special.
Gifting to a 529 education savings plan account—either one you establish or one established by another family member—can be a great idea any time of the year.
New rules make it more attractive
In the past, grandparent-owned 529 accounts were considered part of the child’s income for the Free Application for Federal Student Aid (FAFSA), an application that allows colleges to calculate how much tuition and other expenses the students and their parents/guardians will pay. FAFSA considers up to 50% of a student’s income eligible for college use. Because of a rule change that took place in 2022, grandparent-owned 529 accounts are no longer considered part of the student’s income and won’t affect needs-based eligibility, such as loans or grants.
A host of benefits for you
- Gift tax exclusion: Contributions to a 529 account are considered gifts for tax purposes. The annual gift tax exclusion—the amount you can gift to a loved one tax free—for single filers is $17,000 in 2023 and $18,000 in 2024; for married couples filing jointly, it’s $34,000 and $36,000, respectively. What’s more, you can gift as much as $85,000 to a 529 account in 2023 (or $90,000 in 2024) if the contribution is treated as if it were spread over a 5-year period. Couples can gift $170,000 in 2023 ($180,000 in 2024) using the 5-year election option.1 Note: The amount contributed must be reported on IRS Form 709 for each of the 5 years.
- State tax incentives: Residents of over 30 states may qualify for a tax benefit, either a state tax deduction or state income-tax credit.2 Some states allow the benefit only if you contribute to your home state’s 529 plan, but nine states—Arizona, Arkansas, Kansas, Maine, Minnesota, Missouri, Montana, Ohio, and Pennsylvania—offer tax benefits for contributions to any state’s plan.
- Estate planning tool: In 2023, individuals can gift up to $12.92 million without having to pay federal estate or gift tax, while married couples filing jointly can gift $25.84 million. For 2024, that amount increases to $13.61 million for single filers and $27.22 million for joint filers. Contributing to 529 accounts may allow you to shelter a large amount of your assets from estate taxes while retaining control of the funds in the accounts. Note: If you do end up changing your mind down the road 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.
Stretching 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 grandchild’s 529 education savings plan account. If there is any left over when that child is finished with school, you can simply switch the account over to the next child. The account will continue to grow tax deferred and, if the distributions are used for qualified educational expenses, they can be used tax free. You can even repay student loans (up to $10,000) or roll the assets over into your grandchild’s Roth IRA (up to a lifetime limit of $35,000). 3
Be sure to check with your tax professional, estate planning attorney, and/or financial professional before investing.
Important Disclosures
1 The donor must elect that the gift be treated as having occurred over a five-year period in order for it to qualify for the federal gift tax exclusion. If additional gifts are made to the same beneficiary during this five-year period, a federal gift tax may apply. If the donor dies within this five-year period, a pro rata share will be included in the donor’s estate for federal estate tax purposes. 2 Consult your financial, tax, or other professional to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. 3 Some states do not consider 529 withdrawals to be qualified withdrawals and, therefore, the investor may be subject to penalties. The $10,000 qualified education loan limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Any student loan interest paid for with the tax-free 529 plan earnings is not eligible for the student loan interest deduction.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC.
John Hancock Retirement Plan Services LLC offers administrative and/or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in NY), and John Hancock Life Insurance Company of New York, Valhalla, NY. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.
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