Have you been thinking about what to gift a loved one for the upcoming holidays? Gifting to a 529 college savings plan can be a great alternative to a physical gift and it will benefit your loved one in the future. Education costs are rising and getting an early start on saving for college is one way to help provide financial security. We are going to cover everything that you need to know about gifting to a 529 plan.
What is a 529 plan?
A 529 college savings plan allows you to invest your after-tax dollars and let it grow tax-free. Any withdrawals from a 529 plan are also tax-free as long as the money is used for a qualified education expense, such as tuition or board. Nearly every state has a 529 plan.
A gift to a 529 is a deposit made by anyone other than the account holder. This could be a grandparent, parent, uncle, aunt, or another family member. For 2023, you can give up to $17,000 tax-free per 529 account without filing a gift tax form.
Benefits of gifting a 529
- A 529 plan gift will grow tax-free overtime. The distributions will not be taxed as long as they are used for a qualified education expense. If the beneficiary uses the money for something other than education expenses, then they will incur a 10% penalty and income tax on the earnings.
- Gift givers may also qualify for a state income tax deduction or credit for 529 plan contributions.
- If you want to give a large amount of money then you can take advantage of the special five year gift tax averaging rule for 529 plans.
- 529s can now be rolled into a beneficiary’s Roth IRA without taxes or penalty (starting 2024). There are some nuances (e.g. need to have been opened for 15 years), but this new rule makes 529’s more attractive for saving.
How to gift through a 529 plan
A gift giver can open a new 529 account in a child’s name or contribute to an existing one. Gift contributions can be sent by check to almost any 529 plan. Another alternative to contribute to a 529 plan is with a Gift of College gift card. These are available to purchase online or at over 3,000 retailers including Target and Barnes & Noble. However, please be aware that Gift of College imposes a 5 percent fee, up to $15, on the amounts gifted.
Some 529 plan providers, including Fidelity and T. Rowe Price, have also set up websites that allow friends and family to contribute online directly to those plans. If you are a 529 plan owner, then you must first set up this option and then send the link to friends and family.
How much can I gift to a 529?
You can gift someone up to $17,000 tax-free for 2023. If you do give more than that, then your gifts could reduce your lifetime estate tax exclusion which is currently $12.06 million per person. However, there is a special rule for 529 contributions. If you do plan to give a lump sum larger than $17,000 in 2023, then you can avoid paying taxes using a benefit called the five year gift tax averaging.
What happens if I do gift more than $17,000 to a 529 plan for 2023?
If you contribute more than $17,000 to anyone in 2023, you may need to file IRS Form 709 reporting the gift. Even if you do gift more than $17,000, it’s highly unlikely that you will be subject to a gift tax. Any amount above the annual exclusion will count against your lifetime gift and estate tax exemption. Your total lifetime gifts, beyond annual exclusion amounts, must exceed your lifetime exemption before you are subject to the gift tax. In 2023, the lifetime gift and estate tax exemption is $12.06 million.
If you are worried about exceeding the lifetime gift and estate tax exemption, or if you are looking for an option to contribute more than $17,000, then you can take advantage of the five-year gift tax averaging.
What is the five-year gift tax averaging?
The five-year gift tax averaging, also known as superfunding, is a specific rule that applies to 529 plan contributions. It allows you to make a one-time contribution of up to five times the annual limit and spread the gift over five years. This will not trigger the gift tax or the lifetime gift and estate tax. This means that for 2023, you can contribute up to $85,000 to a 529 account, as long as you don’t contribute to that 529 again in the next 5 years.
If you do take advantage of the five-year gift tax averaging rule, then you will need to file an IRS Form 709 to indicate that your contribution is being spread over 5 years. This form will need to be filed for each of the five years. It’s due by April 15 for gifts given during the previous calendar year.
One potential drawback to the five-year gift tax averaging rule is that if the gift giver dies within that five-year period, then a portion of the gift will be added back to their estate and may be subject to gift taxes.
Are gifts to 529 plans subject to gift tax?
The IRS imposes a federal tax on large gifts. This includes 529 plan contributions. However, the annual gift tax exclusion and the lifetime exemption of $12.06 million mean that most people will never pay gift taxes. The five-year gift tax averaging rules also mean that taxpayers can avoid paying gift taxes on 529 contributions.
What’s the minimum amount you can gift to a 529 plan?
The minimum amount you can gift to a 529 plan will vary from state to state, as each plan has its own requirements. For example, Maryland’s 529 plan and DC’s 529 plan require a $25 minimum gift contribution, and Virginia’s 529 plan requires a $10 minimum gift contribution.
Is a parent contribution to a 529 considered a gift?
Yes, a parent contribution to a 529 plan is considered a gift. Each parent can give up to $16,000 for 2022 to their child’s 529 plan without having to file a gift tax return. This means that parents can contribute a combined total of $32,000 per year.
Can parents each contribute $85,000 to a 529 plan for 2023?
Yes. Parents can contribute a combined total of $170,000. Both spouses must make the five-year election and claim $17,000 per year. However, if either of you does contribute over $85,000 over the 5-year period, then you will need to file a separate Form 709.
How much can a grandparent gift to a 529?
A grandparent can gift $17,000 per person per year for 2023. The same rules apply as any other 529 plan gift giver.
Does the generation-skipping transfer tax apply to 529 plans?
Yes, the generation-skipping transfer tax (GST) does apply to 529 plans. If grandparents contribute to a grandchild’s 529 plan then they will be subject to the Generation-Skipping Transfer Tax. This tax applies when someone transfers property to someone who is at least 37.5 years younger than themselves.
The GST exemption amount is the same as the lifetime exemption amount for gift and estate taxes which is $12.06 million in 2022. The contributions to the 529 plan will count against the grandparent’s GST lifetime exemption of $12.06 if they exceed the $17,000 per beneficiary annual exclusion amount
Does a gift count towards the 529 contribution limit?
Yes, your 529 account has a total balance threshold. The total amount you can contribute to a 529 plan varies by state. The contribution limit generally ranges from $300,000 to $500,000. Once this contribution limit has been met, then no more contributions can be made.
Can I fund a 529 plan in full?
A gift giver may want to pay for someone’s complete college education. In the majority of cases, it is possible to fully fund a 529 plan without having to pay gift taxes. As we explained above, each state has their own contribution limit. Once that limit is reached, then no further contributions can be made. People who contribute the maximum amount to someone’s 529 plan can avoid paying gift taxes by using up part of their $12.06 million lifetime exclusion.
For example, if the 529 account holder is in Washington, DC then they can contribute a maximum $500,000 to a DC College Savings plan. If they decide to contribute the full amount as a lump sum in 2022, the first $16,000 will qualify for the annual gift exclusion. The remaining $484,000 will be reported on IRS Form 709 and counted against their lifetime gift exclusion. After subtracting the $484,000 in 529 plan contributions, assuming no other gifts were made, they would be left with a remaining lifetime gift tax exemption of $11,576,000.
Can you gift your 529 to someone else?
529 accounts can be transferred from one beneficiary to another eligible member of the family. They can also be rolled over into other 529 accounts for the same beneficiary, or an eligible family member.
Can you return gifts from a 529 plan?
Gifts made to a 529 plan are final. A gift return would be considered a non-qualified distribution. This means that you may own income taxes and the 10% federal penalty tax on earnings for non-qualified withdrawals.
Gift to a loved one’s 529 plan today!
A gift to a 529 plan is a meaningful alternative to a traditional gift for Christmas, birthday, graduation, or other special occasions. While you may be subject to gift taxes if you make a large contribution to a 529 plan, most people will never actually have to pay taxes because of the IRS annual and lifetime exemptions. If you are interested in having a comprehensive financial plan, schedule a free discovery call with one of our fee-only financial advisors today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.