The Gift That Keeps on Giving: How to Gift a 529 Plan

Taxes

Holiday shopping for young children can be tricky — especially when you’re shopping for newborns or toddlers who seem to outgrow everything so quickly!

If you’re looking for a unique gift that will benefit a child (and their parents) for many years to come, you might consider investing in their future by gifting them a 529 education savings plan.

What is a 529 plan?

This plan gets its name from section 529 of the federal tax code. Also called qualified tuition programs, 529 plans are an easy, tax-free way to invest in a child’s future education expenses. Each 529 investment account has a designated beneficiary (the child), and the funds can be used to pre-pay their tuition expenses or save for their future higher education expenses.

When it comes to 529 plans for children, the earlier you open one the better. For instance, if you are gifting a 529 account to a newborn, that money would have 18 years to grow before the child goes to college. But you can certainly give the gift of a 529 plan at any age!

College savings plan contributions can also be put toward other qualified expenses such as room and board, textbooks, or even a beneficiary’s student loans in some instances. If needed, parents can also withdraw up to $10,000 per student per year from their child’s 529 account to spend on their K-12 public, private, or religious school tuition.

As long as the beneficiary is paying for a qualified expense, 529 funds are distributed tax-free. If the funds must be withdrawn for a non-qualified expense, only the earnings portion of the distribution would be subject to income tax and a 10 percent penalty.

How do I change a 529 beneficiary?

Now, you might be thinking, “But what if my intended beneficiary decides not to go to college or ends up not needing the money?”

Thankfully, as the account owner, changing your 529 beneficiary is a simple process that can usually be done on your 529 plan’s website. All you have to do is fill out a form. There are no tax consequences or penalties for changing a 529 beneficiary, and you can choose anyone else who is planning to use the 529 funds for qualified education costs — you could even make yourself the beneficiary if you wish!

Do 529 contributions count as gifts?

Yes, they certainly can! Anyone can easily make a gift contribution to a 529 savings plan. You can contribute in one of two ways:

  1. Make a gift contribution to a child’s existing plan.
  2. Open a new plan and name the child as the beneficiary.

If you want to contribute to an existing 529 plan, it is best to contact the account holder (usually a parent of the child) for information on the best way to give. You can generally contribute by writing a check, making an online payment, or purchasing a 529 gift card.

If the child does not yet have a 529 account or you would like to open a new one, you can do that too, assuming you are 18 or older. But it’s always best to check with the beneficiary’s parents first! Opening an account for a child that is not your own can complicate some things when it comes to the child’s financial aid eligibility down the road, in which case it may be easier for a parent to own the 529 account. As with most things, it’s just a matter of personal preference.

Is there a 529 gift tax I should know about?

When it comes to the gift tax and 529 plans, you need to be aware of the annual gift tax exclusion. For 2021, gifts up to $15,000 per beneficiary will qualify for the gift tax exclusion. This exclusion applies to the individual gift giver, so a couple could contribute up to $30,000 annually. In 2022, the gift tax exclusion increases to $16,000 per individual.

If you want to gift more than the 529 plan annual gift tax exclusion allows and would like to avoid being taxed, you aren’t out of options! For example, you could choose to gift an additional amount to the child’s parents, who can then add it to their child’s 529 plan for you.

Another benefit to keep in mind is something called five-year tax averaging, which allows you to gift five times the annual 529 gift tax exclusion limit in one lump sum in a single year. In this case, that would be up to $75,000 in 2021. This lump sum payment is treated as five separate payments over the next five years, so if you used the five-year tax averaging benefit in 2021, you would not be able to contribute to that particular 529 plan again until 2026.

Are gifts to 529 plans tax deductible?

That depends. Your 529 contributions are not tax deductible on the federal level, but you may be able to claim a section 529 gift tax deduction on your state income taxes. Each state has different rules regarding these deductions, so it would be a good idea to familiarize yourself with them. Check out this list to find out if your state offers a 529 tax credit and what its limitations might be.

Give the gift of college savings

While it may not be the most exciting gift a child will receive this holiday season, gifting a 529 plan is a great way to ensure peace of mind — not just for the beneficiary’s parents, but as an investment in the child’s future education and financial health. It’s a great option to explore whether you are a parent, grandparent, aunt, uncle, sibling, or simply a family friend looking to provide a gift that will keep on giving for many years to come.

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