Frequently asked questions about 529 plans
I thought there were some gift
and estate tax advantages with 529 plans, but you didn't mention
that as a benefit. Am I wrong?
The gift and estate tax treatment of an investment in a 529 plan
is a good news, bad news situation. The bad news is that your contribution
is treated as a gift to the named beneficiary for gift tax and generation-skipping
transfer tax purposes and so you need to be aware of this exposure
particularly if you are making other gifts to the beneficiary during
the same year. The good news is that your contribution qualifies
for the $12,000 annual gift tax exclusion and so most people can
make fairly large contributions without incurring the gift tax.
Even better news is that if you make a contribution of between $12,000
and $60,000 for a beneficiary, you can elect to treat the contribution
as made over a five calendar-year period for gift tax purposes.
This allows you to utilize as much as $60,000 in annual exclusions
to shelter a larger contribution. The money (and the growth of your
account) gets out of your estate faster than if you made contributions
each year. And the best news is that the asset leaves your estate
but doesn't leave your control. This is a truly remarkable benefit
when you compare it to the "normal" gift and estate tax
laws. Anyone who is being advised to reduce their estate tax exposure
through gifting, but cannot stand the thought of irrevocably giving
away their assets, can now have their cake and eat it too. Of course,
if you later revoke the account its value comes back into your estate.
Your estate will also have to include a portion of any contribution
made with the five-year averaging election if you don't live past
the fourth year.
Can I invest for one beneficiary
in more than one state's 529 plan?
Sure, no problem. Most 529 savings plans have
no state residency requirements. You can open accounts in as many
of these states as you want, although in most cases there is little
reason to have accounts in more than one or two states.
Can I contribute the maximum
amount in more than one state if I want to?
The IRS currently does not require that states count your investment
in other state 529 plans when applying their own contribution limits.
And there are no "contribution police" out there looking
for people who are intent on using multiple states to stuff hundreds
of thousands of dollars into 529 plans as a kind of tax shelter.
But you are looking for trouble if you contribute more on an aggregate
basis than you can reasonably argue might be needed for your beneficiary's
future higher education costs. Of course, between a pricey private
college, medical school, and then business school you might be able
to support a pretty hefty sum. A state will not want to see its
program misused as a tax shelter (its tax status as a 529 plan could
be threatened) and if a state determines that you have made contributions
without the intent to use the account for college it will terminate
your account and perhaps assess an extra penalty.
I don't have time for all this
and just want to know which state has the best plan. So which one
Sorry, but that's up to you to decide based on your own circumstances
and objectives. The best plan for one family may not be the best
plan for another. Be sure to consider getting the book, "The
Best Way to Save for College - A Complete Guide to 529 Plans",
for in-depth information and planning ideas (or ask your public
library to order a copy).
Can I transfer my child's existing
Uniform Transfers to Minors Act (UTMA) account into a 529 plan?
Many, if not all, 529 plans accept funds coming from an existing
UTMA or UGMA. However, because these funds belong to the minor under
a custodial arrangement, any withdrawals from the UTMA/529 account
must be for the benefit of that minor only. Program rules and state
laws will generally prevent you from making any beneficiary changes
to the UTMA/529 account, and the minor will assume direct ownership
of the account when the custodianship terminates at the age of majority.
Parents who are nervous about a child getting their hands on money
in an UTMA account, and who may be looking to "regain control"
of the money by transferring the funds to a 529 account, may be
disappointed to learn that they are not able to accomplish that
objective without violating state laws (see your attorney). Still,
the placement of UTMA funds in a 529 account can provide all the
tax and investment benefits associated with 529 plans. Remember,
however, that a 529 plan can only accept cash and so any appreciated
securities in the UTMA would first have to be sold and capital gains
would be reportable on the minor's tax return.
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