Making a 529 savings plan contribution is a win-win
When you make a contribution to your grandchild's 529 savings plan, they get money for college, and you get a tax benefit.
Giving to a 529 savings plan can benefit your estate planning
Contributions to a 529 savings plan are treated as gifts, which means they also qualify for the annual gift-tax exclusion.
Here’s the breakdown on contributions:
- You can make sizeable investments or transfer significant assets out of an estate, including up to $18,000 a year ($36,000 for married couples) per beneficiary without gift-tax consequences.
- Under a special election, you can combine up to five years into one contribution of up to $90,000 ($180,000 for married couples) without gift-tax consequences. Additional gifts made to that beneficiary over the next four years after the year in which the one-time gift is made may reduce the donor’s lifetime gift and estate tax exemption. If the donor of an accelerated gift passes away within the five-year period, a portion of the transferred amount will be included in the donor’s estate for tax purposes. Consult with a tax professional regarding your specific situation. Tax-advantaged treatment applies to savings used for qualified education expenses. State tax treatment varies.
- State tax deductions may be disallowed in the event of nonqualified withdrawals. If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states.
- Lump-sum contributions can be applied to multiple beneficiaries, so you can share the the wealth amongst multiple grandchildren.
- You can also make smaller contributions throughout the year. As long as they don't add up to more than $18,000 per beneficiary, the same rules apply.
While the tax benefits are great, the impact these funds can have on your grandchild’s future education are even better.
- Every little bit helps. Every dollar that a student can use from a 529 savings plan is one less dollar they may have to take out in student loans.
- Sharing in funding education can be bonding for families; what a beautiful gift to pass on to your children and grandchildren. They’ll thank you for it!
How to make a contribution
In most cases, family and friends can easily make contributions to a 529 savings plan. Still, there are a few things you should research before opening your wallet:
- If you have the account number, you can send in a check or even make direct deposits.
- Surprise your grandchild with an added contribution on birthdays and holidays — annual gifts can make a big boost to the balance over time.
- Check with your son or daughter, and even your financial professional, to make sure your contributions are timely. If your grandchild is nearing college and in the process of applying for financial aid, contributions can affect eligibility.
