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A Lesson on Gifting a 529 Savings Plan

A Lesson on Gifting a 529 Savings Plan

| May 26, 2024

529 savings plans are a way to gift education expenses for those who wish to invest in a child's future. Funding a 529 plan is considered a gift to the beneficiary for estate tax purposes, and all contributions and earnings grow tax-free outside of the donor's taxable estate. As a gift giver, you can open a 529 plan for a beneficiary and retain control of the 529 plan and its assets since you are the owner. Or, you can gift to an existing 529 plan as a donor.

Reasons why donors gift using 529 plans

  • 529 plans provide tax-advantaged growth and tax-advantaged withdrawals for education-related expenses without beneficiary age restrictions or required distributions.

  • 529 plans allow the owner to retain complete control over the assets.

  • 529 plans allow grandparents and parents to contribute, regardless of who owns the plan.

  • 529 plans allow donors to make five years of contributions at once without incurring federal gift tax.

  • You may own and fund 529 plans for as many beneficiaries as possible.

How much you can contribute to a 529 plan

It is important to note that the IRS has funding limits on how much donors can contribute to 529 plans per year. For 2023 the limit is $17,000 per donor or $34,000 per married couple. However, by initiating a 529 plan super-funding strategy, donors can make a lump sum contribution of up to five times the annual gift tax exclusion ($17,000) at once to each 529 plan. If you intend to gift using a super-funding strategy, consult your tax professional first to determine how it will impact your tax situation in the year you intend to make the gift.

Tax implications

While gifts are not tax-exempt at the federal level, they may or may not be tax-exempt at the state level, depending on your state's tax laws. Many states offer tax deductions for contributions made into their state's 529 plan. However, you must be a state resident to take advantage of the tax deduction. The plan's earnings are tax-exempt at federal and state levels but only when used for qualifying expenses such as tuition, room and board, fees, computers, and other educational equipment.

529 plans are gifts that can help beneficiaries work toward their educational goals. Suppose you are considering a 529 plan and want to understand how gifting can help your tax and estate planning. In that case, a financial and tax professional can help determine how it will impact your situation.


Important Disclosures

The content in this material is for educational and general information only and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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