Many of our clients are contributing to 529 plans for their children, grandchildren, nieces and nephews. A 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs. It is named after Section 529 of the Internal Revenue Code which created these types of savings plans in 1996. These are a wonderful vehicle for assisting with or contributing to the education of a young person while, at the same time, benefiting from some tax advantages. Here are some things to consider:
- All contributions to a 529 plan qualify for the annual federal gift tax exclusion – currently excluding from gift tax up to $15,000 ($30,000 for joint gifts) per year. Additionally, the donor of funds to the 529 plan can “frontload” five years of gifts without triggering the filing of a gift tax return. This means that in 2018, an individual can put $75,000 into a 529 plan all at once without having to worry about gift tax consequences.
- Contributions made by a donor to a 529 plan are not considered part of your estate for federal estate tax purposes when you die, even though, as an owner, you may retain some control over the account. This makes a 529 account a good way to get money out of your estate for estate tax purposes.
- The contributions to the 529 plan grow tax deferred. Withdrawals from a 529 plan that are used for qualified education expenses are completely tax free at the federal level. You will need to make sure that you save all receipts and keep good records of how the 529 plan funds are spent. The IRS does look at the expenses to make sure that they are “qualified education expenses” and those expenses that are not qualified education expenses are subject to a 10% penalty on the earnings and is taxed to whoever receives the distribution.
(Updated Nov. 15, 2018)