As grandparents and other loved ones seek to leave a legacy and impact the next generation, young people are facing record-high college costs and unmanageable student debt. Fortunately, the 529 plan gift contributions help solve both problems by providing a pathway for donations to alleviate a major problem for students and save money for college. It’s important to understand how to contribute gifts to a 529 plan without the tax burden. You may also want to work with Financial Advisor who can help you create a college savings plan for your own financial situation.
What is a 529 plan?
One Plan 529 is a tax-advantaged investment account to pay for education and related expenses. College tuition, K-12 education, books, laptops, and more are eligible expenses for these accounts. Paying for school with a 529 plan also helps prevent other savings accounts from being eligible for your financial aid.
529 plans run at the state level, so account features vary by state. For example, the maximum contribution to your plan depends on state regulations and ranges from $235,000 to over $500,000. However, you will encounter two main types of accounts when setting up your plan: college savings plans and prepaid tuition plans.
College savings plans function like Roth IRA, except that you withdraw for education instead of retirement. With a college savings plan, you choose investment funds to create investment portfolio or hire a financial advisor to set up your investments. Usually, packages provide mutual fund, share, bonds and FDIC insured saving account.
When you build a portfolio, you contribute after-tax dollars to the account and are invested accordingly. Then, when the program’s designated beneficiaries start school, they can withdraw funds to pay related expenses.
Prepaid tuition package allows you to pay for future education at today’s prices. These plans help save money by accounting for the cost of education in advance and avoiding rising educational costs. However, the only qualifying costs for these plans are tuition and required institution fees. As a result, you may have to cover extra cash for books, computers, and other expenses in addition to tuition.
How to donate gifts to Plan 529
Giving a 529 package is a simple process that you can complete online or by check. If you don’t have the account information, ask the account owner (designated beneficiary or a relative of the beneficiary, such as a parent or guardian) for information about the program. You can then use the package’s website functionality to send the gift electronically. Countries often use Ugift as a platform to contribute online to 529 plans.
For mailing, you can mail a check to package 529 with the name and account number of the designated beneficiary. The account owner and the designated beneficiary state can provide you with the necessary account information for the gift.
Parent-owned 529 package benefits
Parents who own 529 plans on behalf of their children may be eligible for a state income tax deduction and tax credit for contributions, depending on their state. Additionally, donors can contribute $16,000 per donor per year without paying tax on the gift. This number will increase to $17,000 by 2023.
Money in a parent-owned 529 plan also has much less of an impact on student aid eligibility. For example, a parent with a 529 plan for their child will have 5.64% of their assets count toward student aid eligibility, which means their child is more likely to receive an generous assistance for expenses that the 529 plan does not cover.
Finally, parent-owned 529 plans do not generate untaxed income for their children when they withdraw money for education expenses. Until October 1, 2022, withdrawals from grandparent-owned plans become taxable income for students, who bear the financial burden of paying for school. This rule seems to have changed, but parent-owned accounts have never had this problem.
Consider gift tax
Gift tax can be an issue for the giver because of how expensive it can be for both parties. The last thing you want is to have a hard time paying taxes on a gift, or worse, having your loved one pay a ton of taxes on receipt of that gift. However, the following tips can help you avoid them altogether:
Exclude annual gifts
As mentioned above, donors can award $16,000 annually to each beneficiary without incurring taxes. So keeping your donations below the limit will help prevent gift taxes.
The exclude annual gifts is per donor per recipient. So, for example, you can divide your three grandchildren $16,000, and your spouse can also divide each grandchild $16,000 separately without incurring gift tax. For 2023, the limit will increase to $17,000. Remember that donations of any size count toward your lifetime gift and tax-free limit.
Lifetime Gift and Tax Free
If you go over the $16,000 / $17,000 gift limit, you can use Form 709 to report the funds and pay no gift tax. This report contributes to lifetime gift and property tax exemption, currently $12.06 million and will be $12.92 million in 2023. You are exempt from gift tax if your lifetime gift falls within this limit. However, if Congress doesn’t pass another law to maintain these limits, they could drop to around $5.49 million after 2025.
Super fundraising
If you have a substantial financial gift to make past the annual limit and are exempt from taxes for life, tax laws allow you to pay back the 529 plan. Superfunding means breaking. contribution into five parts that go into the account once a year. For example, if you make a super fundraising contribution for the years 2023 to 2028, you will have five contributions worth $17,000 each deposit into the 529 plan. At the end of 2028, you will have contributed a total of $17,000. 85,000 dollars.
Ways to claim college savings as a gift
529 giveaways are a great way to grow your account. Parents and prospective students alike can use the following strategies to keep friends and loved ones engaged:
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Appeal through the 529 online file: Your 529 plan there might be a web component where you can create a profile. Displaying your achievements and aspirations can inspire your loved ones to support you. Additionally, some 529 packs have an online swag store, where your supporters can donate money with branded clothing and decorations.
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Streamline provisioning through Ugift code: You can create a shareable link through the 529 plan or the plan’s Ugift platform. Then, spread it via email and social media, and donors can use it to navigate directly to your plans page and as a giveaway.
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Include your call to action in the party invitation: Summer graduation parties and high school birthday parties are ideal events to promote your 529 plan. When sending out invitations, include a link or code for your 529 pack and encourage partygoers to donate instead of buying a gift. Whether you send physical or electronic invitations, your guests will have contribution information.
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Reach through social media: Parents posting about how proud they are of their children or prospective students expressing their educational goals on social media can attract donations. Include a link to your 529 plan with a call to action to support your student’s college dreams. The wider your social media audience, the more likely you are to engage with your posts.
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Don’t forget Physical Mail: When announcing your 529 package, include a physical mailing address for donors who want to send a paper check. However, backers who contribute to your 529 plan by check will need personal information, such as account numbers, so it’s best not to share this information with family and close friends. .
Can My Child Use 529 Plan Expenses Outside of Education?
Your child can use the money in their 529 plan for purposes in addition to qualified educational expenses. However, they will be subject to a 10% penalty when withdrawing and paying income tax.
Fortunately, 529 plans have the flexibility to help you use the money without penalty. First, you can make another child of yours or yourself a designated beneficiary by moving the money into another 529 plan. Any member of your immediate family who intends to further study can benefit.
Second, the establishment of every community to increase the likelihood of retirement (SURE) The 2019 Act authorizes 529 paid plans for non-college education courses, such as a trade apprenticeship. For example, expenses related to being an electrician or carpenter may qualify for 529 coverage.
Third, you can repay $10,000 in one-time student loans to each eligible beneficiary or family member with a 529 plan and $10,000 in K-12 education costs per year. Additionally, eligible K-12 education covers private school tuition.
Key point
Giving away a 529 plan contribution can be a great way to give a loved one the gift of college money, and it comes with a number of benefits. tax benefits. You can make 529 plan contributions online or by check with a generous maximum coming through 2023. Your annual limit is $17,000 per beneficiary per year, while you have payback for a plan with 5 years’ worth of contributions. Donations over these limits will require you to fill out Form 709 when filing your tax return to avoid paying gift tax.
Tips for Donating a Gift to a Plan 529
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Contributing to a 529 plan can have significant tax breaks if you accidentally exceed your annual or lifetime limits. A financial advisor can help you optimize your loan and minimize your tax burden. Finding a financial advisor that fits your needs doesn’t have to be difficult. SmartAsset’s free tool Match you with up to three financial advisors serving your area, and you can interview your advisor matches for free to decide which is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.
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Gift contribution limits will change next year, and so will the 529 packages themselves. Use this guide to check 529 best plans for 2023.
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