Gift Education and Get Tax Benefits with a 529 Savings Account
Published on by Kellie Woodruff in Estate Planning, Tax Services, Wealth Management
We all know charitable donations and gifts present unique opportunities for tax savings while assisting others. But did you know there’s a way to help your children and grandchildren achieve a quality education that also enables you to receive tax benefits?
It’s true — contributions to 529 education savings plan accounts are considered gifts for tax purposes. Whether the account’s established by you or another family member, your gift to 529 accounts will be tax-free.
Why a 529?
529 education savings accounts are a secure way to save for your children’s or grandchildren’s education. The account holder can only spend the money on expenses directly related to education, but accumulated earnings and qualified withdrawals are tax-free. Thanks to the Tax Cuts and Jobs Act, the use of 529 funds extends to all levels of public and private education, from K-12 to vocational school and university.
Since 529 plans also accept third-party contributions, a grandparent can gift to a grandchild’s 529 plan and receive the tax write-off, regardless of who owns the account. However, unlike the person who set up the account, grandparents or other relatives making gifts in this manner cannot withdraw the funds once contributed.
The specific tax savings
There are multiple ways to cash in on the tax benefits. On the most basic level, the annual gift tax exclusion allows you to gift up to $18,000 as a single filer or $36,000 if you’re married and filing jointly (MFJ), to any individual tax-free. For example, if you have three grandchildren, you could give each of them up to $18,000 (single) or $36,000 (MFJ).
With 529 gifts, the limits can change based on how you structure the donation. In 2024, you can gift as much as $90,000 (single) or $180,000 (MFJ) if the contribution is treated as if it were spread out over a 5-year period, using the 5-year election option. If done in this manner, you must report the amount on IRS Form 709 for each of the 5 years.
You can also utilize 529 account establishment as a strategic estate planning tool. For 2024, you can gift up to $13.61 million (single) and $27.22 million (MFJ) without having to pay federal estate or gift tax. Contributing to 529 accounts may allow you to shelter a large amount of your assets from estate taxes while retaining control of the funds in the accounts. If you end up changing your mind down the road and revoke the funds in the account, they’ll be added back to your taxable estate. There is no joint gift-tax return, so if you’re married, you and your spouse must file separately.
On top of the already significant tax incentives, the tuition gift tax exclusion allows grandparents or supporting individuals to reduce their taxable estate while helping a child pay for college. When paid directly to an educational institution, tuition payments themselves are also exempt from gift taxes and the generation-skipping transfer tax. Grandparents don’t have to file a gift tax return when money is paid directly to a college, even if the amount exceeds the annual exclusion of $18,000 for single filers and $36,000 for those married filing jointly.
Keep the gift going
If you establish a child or grandchild’s 529 education savings plan account and there’s money left over when that child is finished with school, you can simply switch the account over to the next child. The account will continue to grow with tax-deferred and, given the distributions are used for qualified educational expenses, they can be used tax-free. Your beneficiary can even repay up to $10,000 in student loans.
While 529 accounts must still only fund education for the child’s duration in school, a new rule went into effect this year that broadens the use of the funds post-graduation. This provision allows over-funded 529 plans to roll over into your relative’s ROTH IRA with a lifetime limit of up to $35,000. Additional stipulations do apply, which you can read about in more detail here.
There’s always more to learn about the intricacies of 529 plans and the ever-changing financial landscape.
Curious about how you can relieve the financial burden of education for your loved ones, all while saving money on taxes? Connect with our financial planning pros to find the strategy that fits your situation.
More resources
If you’re interested in other ways to support your loved ones and save on taxes, check out our article on simple and complex trusts. We also have resources on other tax credits and incentives for you to explore.
For an in-depth dive into planning your legacy, download our free 2024 Estate Planning Guide.
