|529 Plans and Estate Planning
In 2019, gifts of up to $75,000 (or $150,000 for joint gifts) can be made to a 529 plan and no gift tax will be owed if a special election is made to spread the gift evenly over a five-year period.
Tax Consequences of 529 Plans
The following chart summarizes the federal tax consequences of gifting to a 529 plan.
All contributions to a 529 plan qualify for the annual federal gift tax exclusion — $15,000
for individuals or $30,000 for joint gifts in 2019.
A special election for gifts up to $75,000 ($150,000 for joint gifts) can be made
where the gift is spread evenly over a five-year period and no gift tax will be
Grandparents are subject to the generation-skipping transfer tax (GSTT) in addition
to federal gift tax. Gifts of $15,000 or less ($30,000 for joint gifts) are excluded
for purposes of the GSTT. Only the portion of the gift that results in federal gift
tax will also result in GSTT.
Contributions made to a 529 plan generally aren't considered part of your estate
for federal estate tax purposes when you die, even though you might retain control
of the funds in the account (as 529 plan account owner) during your lifetime. Instead,
the value of the account will be included in the beneficiary's estate.
The exception to this general rule occurs when you elect to spread a gift over five
years and you die during this five-year period. In this case, the portion of the
contribution allocated to the years after your death would be included in your gross
estate for tax purposes.
Contributions grow tax deferred.
Withdrawals from a 529 plan used to pay the beneficiary's qualified education expenses
are completely tax free at the federal level.
Withdrawals from a 529 plan that aren't used to pay the beneficiary's qualified
education expenses (called a nonqualified distribution) face a double consequence — the
earnings portion is subject to a 10% penalty and is taxed at the recipient's rate
(in other words, the person who receives the distribution — either the account owner
or the beneficiary — is taxed on it).