One way to save for a loved one’s college education is to contribute to a 529 plan.

The Tax Cuts and Jobs Act expands this to be used for grades K-12. The main benefit of this plan is that earnings grow tax free even though contributions may not be deductible for federal or state tax returns. Some states may allow for 529 plan contributions to be deductible. Additionally, the states that allow contributions to be deductible have requirements, and those requirements vary state to state. Please ask your financial advisor or tax professional for further details.

There are limits to what the 529 plan pays out.

Proceeds from the 529 can be used in college or post-secondary institutions for tuition, books, supplies, and some room and board costs.  For K-12, proceeds can be used for tuition.  Any money paid that is not attributed for these purposes become taxable and subject to a 10% penalty for non-qualified use.

Wealthy donors who want to estate plan can use the 529 as a tool.

Contributions to an individual’s 529 plan is considered a gift and for 2021, the limit is $15,000 per beneficiary for an individual or $30,000 per beneficiary for a married couple. This does not affect the Lifetime Gift Tax Exclusion. The Lifetime Gift Tax Exclusion is the amount of monetary gifts (up to $11.7 million in 2021) you can give over the course of your lifetime without having to pay taxes.

There is also a way to contribute five years’ worth of gifts in one year.

This is $75,000 for individuals or $150,000 for married couples.  You could qualify by filling out a Gift tax return and making a special election. This does not affect the Lifetime Gift Exclusion because the worth of contributions in that year prorate over five years on the Gift tax return.

The benefits over time for the recipient of a 529 will be far greater due to compounding interest than the same amount being contributed over 18 years. When frontloading a 529 plan, if there are any other gifts made in that 5 years prorated period, gifts will either be taxable, or part of the Lifetime Exclusion will be used. 

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