Good News/Bad News on 529 Gift Tax Situation

When investing in anything, particularly for college, many advantages and disadvantages go hand in hand with the savings. For example, there are many tax advantages to having a 529 savings plan, but there is the disadvantage its intention is solely for college.

This means that you are able to save more money than you can with any other investment, but if this money’s purpose changes, this savings no longer applies. Similarly, there are both good and bad points on the gift tax situation of the 529 savings plan for college.

The first and most important thing to understand about gift tax issues on your 529 savings plan is that the rules may vary from state to state. This is very important, and if it is an issue with you, considering the rules and regulations of other states’ programs may be a good way to go.

Typically, gift taxes are taxes paid on gifts of monetary funds because they are a source of income. These taxes may apply when relating to a 529 savings plan, but there are limitations. It is important to understand that the gift tax limitations stop at $12,000 per year, which may be bad news for those who need to use more funds than this.

However, this increased in 2006 from the $11,000 it was originally set at, and may increase to an amount even higher than that by the time your child reaches college age. It is also important to know that this only applies if the owner of the account is a single person. This is double that amount for a couple, and modifications are possible if the amount of contributions will exceed this limit.

For example, if you make an agreement to contribute in equal amounts over a five year period, you will be allowed to contribute up to $60,000 every calendar year for an individual or double this for a couple.

By agreeing to contribute in equal amounts, and to make no other monetary gifts to the beneficiary, you will receive gift tax exclusions through the federal government. Typically, this would not be possible, and the cost of investing would be much higher.

The bad news about this gift tax is that this applies at the federal level. For those living in, and contributing to, state programs of the 529-college savings plan of states that have no income tax, this is the only concern. However, the rules may be different for gift taxes at the state level if there is a state income tax.

This is why it is important to discuss and fully understand all aspects of the 529 plan within your state, and to consider possibly investing in other states. By talking to your tax advisor, you will be able to determine whether it is best to invest in the 529 plan of your own state or to contribute to an account run in a state with no income tax, and therefore no gift tax.

You should also know what benefits you may be losing if you do choose to go this route, as most states offer incentives for those who use their own state’s program. By knowing all this information, you will be able to understand how the gift tax laws will affect you and your beneficiary, and you can make the best choice regarding investment for college.

Keep in mind that the amount of research involved in finding the best college savings plan may be equal the research needed in finding the best school in which to use those funds. Spending as much time as necessary doing the research can literally pay off in the end.

The 529 College Savings Plan as an Estate Planning Move

Let’s take a brief look at the 529-college savings plan as an estate-planning move. A 529 plan is not merely just a great vehicle to fund your child or grandchild’s future. A 529 plan is an excellent tool to remove money from your taxable estate. This will assist you in lowering your tax liability and keeping intact more of your estate for your loved ones once you pass.

All 50 states and the District of Columbia now offer some type of 529 savings plans. A 529 plan is a state sponsored savings plan that invests money on behalf of beneficiaries. The earnings are tax deferred from federal income tax and most states have programs that will defer state taxes. If your beneficiary uses the money from this fund for any qualified education purpose, the withdrawals will be free of tax.

There is a lot of competition between states that has lead to very large contribution limits. This is good news for you as you plan your estate. 529’s have extremely simple investment options- age based and individual portfolios. Basically, these college savings plans afford the family the ability to transfer wealth from generation to generation, free of income, estate and gift taxation.

So what makes a 529 college savings plan so attractive to an estate planner? They do not have any income limits unlike the educational IRAs. Almost everyone can qualify for a 529. And if you’re looking for a way to reduce your estate tax bill, this is a great solution.

Take advantage of $11,000 in annual tax-free gift contributions. If you’re married that means you can contribute up to $22,000 for each beneficiary in one year. This is free from federal gift tax penalties. It is advisable to look into your state laws on gift planning for 529’s as they vary.

If you need to reduce the size of your estate you could contribute up to $60,000 (five years worth of gifts) in year one of a five-year period. Or if you’re married you can contribute up to $120,000. This is a good resource to transfer wealth by reducing the size of your estate and do away with estate taxes.

The account owner is always in charge of the plan’s assets. Even though the monies added are considered gifts, the owner does keep control. The donors can even take back the money for themselves or transfer the account to another beneficiary. If the owner of a 529 account were to die, the value of the account would not be counted in the estate.

The account value would be in the beneficiary’s estate. The exception to this would be if you had made the 5-year election and passed before the 5 years was over. Then, the part of the contribution that was assigned to the years after your death would be included in your federal gross estate.

It is also very easy to move the money in an account through 529 rollovers or by changing your beneficiary. If you have a need to distribute your estate, you can set up 529 plans for a large array of family members. This includes children, siblings, grandchildren, uncles, aunts, stepfamily, cousins and so forth.

If you need to transfer wealth, look into 529 plans as part of your estate planning strategy. At the very least, the 529 college savings plan, as an estate-planning move is something to discuss in more depth with your tax professional. This is an extremely generous gift for your beneficiary. Imagine the reward of knowing you've provided someone with the gift of an education.

What Contributing Grandparents need to know about 529’s

What exactly should grandparents need to know about 529 college plans? Some things just seem to go together like hot dogs and baseball, peanut butter and jelly, and of course, grandparents and 529 plans.

It’s a very lucky family that can depend upon grandma and grandpa to help with college tuition bills. College expenses aren’t exactly shrinking. The best gift that anyone could give could be your grandchild’s education fund and a 529 plan is a great way to get started.

A 529 plan is a state sponsored savings plan that invests money on behalf of beneficiaries. The earnings are tax deferred from federal income tax and most states have programs that will defer state taxes. If your grandchild uses the money from this fund for any qualified education purpose, the withdrawals will be free of tax.

Grandparents are allowed to contribute up to $11,000 per year per grandchild. So if Grandpa and Grandma have two grandchildren could place up to $44,000 in funds for the grandchildren without any gift tax liability. The grandparents would each have to set up 2 funds for each grandchild (a total of 4).

Grandparents will still have control over these funds and can retrieve the money if needed. Of course, there will be taxes and penalties on an unqualified withdrawal but the taxes and penalties will only be on your earnings, not on the amount of the original contribution.

The 529 plans have lots of investment options, which create a big decision for the grandparents to make. Grandparents typically are more conservative than the child’s parents. The most popular approach to 529 investments tends to be the age-based option. This is a simple way to save for college. You do not have to personally adjust your allocations over time.

The fund is managed according to the age of your grandchild. Younger children have more of a stock concentration. As your child gets older, the assets are automatically shifted into a higher ratio of short-term investments and more stable bonds.

Grandparents could also check and see if the 529 plan that your have set up will accept a third party contributions. This will take all of the worry about opening and maintaining your own accounts. State tax deductibility may be an issue if you go this route. Some states allow you a deduction for at least part of your contribution to their 529 plans. As a third party donor you will not be eligible for this deduction.

If you ever need to apply for Medicaid benefits, the state will look at your 529 plans as countable assets. You are eligible to take back the money you’ve invested so the money is technically available to pay medical or nursing home expenses. If you have this concern, it is an issue to discuss with your tax professional or attorney. It might be a good idea to make someone else the owner of the fund.

A big concern for grandparents is what would happen to the money in the 529 accounts if your grandchild chooses not to attend college. A great option is to change the beneficiary to another family member or even yourself. You can change the beneficiary as much as you want.

Another option is to take the money in the fund for your needs. The earnings in the account will be subject to a 10% penalty rate and will be taxable as income.  This is some of what contributing grandparents need to know about 529’s. It is a great way to invest in your grandchild’s future. You have picked an incredible gift to give to your very lucky grandchild.

The Pros and Cons of the Coverdell ESA for College

As you’re setting up investment plans for your child’s college, it’s smart to be aware of the pros and cons of the Coverdell ESA for College. This educational savings account is a very attractive savings plan for many people. Let’s take a look at some of the negatives and positives of this program and so you can see if it’s a fit for you.

Pro- The Coverdell Education Savings Account can be self-directed with a wider array of investment products available than a 529 plan. The account can be placed in almost any sort of investment. Typically, stocks, bonds, bank CDs, mutual funds and unit investment trusts. No part of trust assets may be invested in life insurance contracts.

Pro- The Coverdell funds are available to finance elementary and secondary school, not just college. This includes items such as tuition, fees, tutoring, books, supplies, room and board, uniforms, transportation and computers.

Pro- Earnings accumulate tax-free. Qualified distributions are exempt from federal income tax. Please note that contributions are not deductible on federal or state income tax.

Pro- Corporations may contribute. This even includes tax-exempt organizations. Regardless of income level, corporations may contribute to an individuals Coverdell account.

Pro- People can contribute to both a Coverdell account and a section 529 plan in the same year. Note that there may a gift tax implication if you give more that $12,000 per beneficiary.

Con- Contributions to the Coverdell ESA are limited to $2000 per beneficiary per year. Here’s an example, you have a son and a daughter that you want to contribute $3500 into Coverdell accounts for. You deposit $2000 to your son’s account and $1500 into your daughter’s.

Their grandmother wishes to add another $1000 but she is only allowed to put $500 into your daughters account as the $2000 limit has been reached. At $2000 a year, it would be tough to have this be your entire college savings plan.

Con- Contributions can only be made until the beneficiary reaches age 18. This may be a non-issue with some families but a 529 plan would allow you greater flexibility. There are no age restrictions for special needs beneficiaries.

Con- The money must be used by the time the child reaches the age of 30. If the funds are not used, the earnings will be taxed as ordinary income plus a 10% penalty.

Con- There is less flexibility in changing beneficiaries in a Coverdell ESA. Coverdell plans are considered permanent gifts. You cannot open up an account for your child and take back the money for your own use. Typically, the parents are responsible for the account until the child reaches 18. Then, the beneficiary usually takes control of the account. There is some ability to change beneficiaries.

Con- The Coverdell ESA is not eligible for the state tax deductions available for some 529 plans. The available 529 state tax deductions vary from state to state. Of course, a tax deduction is not the only reason to select an investment.

Con- The contribution limit is phased out for contributors with an adjusted gross income between $95,000 and $110,000 for single people and between $190,000 and $220, 000 for joint filers. A clever way around this con if you’re in this income bracket is to give the money to your child and let her open a Coverdell for herself.

After looking at the pros and cons of the Coverdell education savings fund, you can see if this is a wise investment for your child. The items that have been identified as cons are non-issues for many people. Coverdell is a good investment overall for most families. Talk with your tax profession and see if it’s right for you.

Keeping Track of your 529 College Plan Contributions

There are several reasons that it’s important to keep track of your 529 college plan contributions. When investing in a pre-paid 529 college plan account overpayment means money that parents won’t be able to withdraw or to use if the student doesn’t need it or ends up not going to college.

When investing in a non pre-paid 529 college savings account it’s important to keep track of your investment contributions because that money may be subject to an income tax deduction in the state you live in.

This is important for any family member who is contributing to the child’s 529 college savings fund, and anyone in the family can contribute money to the college savings fund although the contribution may not be tax deductible in all states.

Keeping track of your contributions to a child’s 529 college savings account is also important so that you can keep track of how much money has been invested, if the investment is growing fast enough and what the rate of growth is. After all, that account is very important to the family because the child’s future education depends on it.

The money that parents or other family members contribute to a 529 college savings account is considered to be a gift and as a gift that money qualifies in the tax code as part of the annual $11,000 gift tax exclusion. So, any family member can contribute up to $11,000 annually without any taxes being applied to that money.

According to the current Federal gift tax law, parents and family members can give up to five years' worth of financial gifts, so a total of $55,000, in one year with no tax penalties, however that person would not be able to contribute any money to the account for four years following that year.

Making a large contribution makes a lot of sense whenever a parent or family member can afford it because the interest on such a large payment would accrue faster and in greater amounts than interest on smaller payments, even if there were lots of smaller payments made during the year.

If you have a personal banker or investment professional who takes care of the household’s investments make sure that the investment professional gives you a detailed accounting of all the contributions made to the non pre-paid 529 college savings account every quarter or every month and keeps you advised of important matters pertaining to the account.

The best way to make sure the investment is doing well is to monitor it yourself, but many people find investing confusing and prefer to leave their investments to be managed by a professional.

When tax time comes around, be sure to document all your contributions to the child’s 529 college savings program if your state allows tax deductions on that money to make sure that those deductions are applied to your taxes.

Keeping track of your 529 college plan contributions also means staying on top of the latest developments in the laws regarding 529 college savings plans. Make sure to stay on top of any changes in the laws regarding 529 college plans to make sure that you don’t end up losing money.

While a non pre-paid 529 college savings plan has a relatively moderate risk level, there is still some risk and it’s best to monitor the contributions and management of the 529 college savings plan closely to make sure that the investment is still performing well and growing under the asset company’s management.

Be sure to address any questions about the contributions to or the performance of the 529 college savings account to the asset management company chosen by the state to administer the account rather than to the state itself because the state is not involved in the direct management of the 529 college savings fund.

What the $12k Gift Tax Exclusion is All about in Terms of 529 Plans

When you get ready to save for college, whether you are saving for your own child or for a grandchild, there are many possibilities for you to consider. Will need shear it gets more and more expensive to fund a college education. Because of this many people are looking into starting college education funds from the time of their child or grandchild is very young.

One of the more popular ways to save for college is the 529 plan that allows you to put money back for college now and lock in today's savings. Another reason why the 529 plan is so popular is because of the $12k tax exclusion. This tax exclusion allows anybody to give to a 529 plan tax-free, as long as it does not exceed $12,000. Here is a closer look at the 529 college savings and this gift tax exclusion.

There are many reasons why the 529 plans are so popular today. These types of plans encourage people to save now for their child's future college expenses. This plan is also known as the qualified tuition plan and is sponsored by state colleges and universities and are fully endorsed in authorized by the Internal Revenue Service.

There are essentially two different types of 529 college savings plans. One is the prepaid tuition plan, and one is the college savings plan. All 50 states support these plans, and all public colleges and universities are required to take the 529 college savings plan. There are even a small group of private colleges and universities that will accept this plan as well.

The prepaid 529 plan is quite popular because it is accepted in all states at public universities and colleges in locks in college tuition fees at today's costs. The money saved using the 529 plan covers all costs associated with attending college, including room board books and other necessities.

Many family members like to contrary to the 529 college savings plans for a variety of reasons. One of these reasons is because they can give this money to the recipient and save on taxes. You have got to $12,000 as the gift tax exclusion is applied to your gift. All contributions to a 529 college savings plan are completely exempt from the estate taxes and gift taxes.

If the certain specifications and criteria are met. For example, a parent who owns an account for their child can make a lump sum contribution of up to $60,000 for each of their children when they did this.

They can avoid incurring a taxable gift on this amount. This is a great way to save money for college without being double tax in the end. Nobody wants to have their child go to the frustration of having to pay taxes on a lump sum of money that they have intended to use as college.

In addition is also important to remember that the 529 college savings plan is also popular because it is safe from bankruptcy, should it occur. Almost everyone can open a 529 plan based on their financial situation, because most of these plans offer a wide variety of saving options.

The best way to get detailed information about the 529 savings plan is to consult your account or financial advisor or find information on the Internet before deciding to use a 529 plan were before you decide to use the $12,000 gift tax exclusion you should understand how these plans were and how it will affect your income.

When you have children, and you want them to attend college, why wait until it's too late to save for college? Learn more about the 529 college savings plan today and start saving now.