Financial Services

Those 529 college savings plans can be a flexible way to transfer wealth


Ariel Skelley | DigitalVision | Getty

The benefits of 529 plans

In a worst-case scenario, someone may overfund the plan and use the money for non-qualified expenses. In that case, they may owe income taxes on the account growth, plus a 10% penalty.

There may also be a state-level levy, depending on the plan.

Despite that, the money has still grown tax-deferred for years, “which is quite a big deal,” said Adam.

Families may reduce the tax bill if their child withdraws the money and reports the income and penalty on their own tax return, she said. 

Of course, this assumes their child is in a lower income tax bracket.

“There’s hardly any downside,” she added.

Transfer wealth with 529 plans

With the threat of higher taxes looming, some families may be eager to shift wealth to younger generations. 

Grandparents may use a 529 plan for their grandchildren and possibly generations after that, said Herzberg. But there’s one problem: gift taxes.

Wealthy donors often worry about gift taxes, a levy on certain transfers of more than $15,000 per recipient per year. If they gift more than their lifetime limit, they will owe gift taxes on the transfer. 

However, there’s an exception for 529 plans, Herzberg said.

Donors may front-load $15,000 contributions for five years by adding $75,000 at once, and they may double their transfer to $150,000 if their spouse agrees to make the same gift.

Donors may use this strategy for multiple recipients, without the risk of gift taxes.

“This is a great way to get grandparents to start making gifts to younger generations and transferring their wealth in a way that really matters,” said Adam.

And unlike some other estate-planning tools, donors may take the money back if they need it, said Herzberg.

These perks may allow families to reduce their estate while paying for education for generations to come, he said.

“This is something that should be in the back pocket of every professional advisor,” said Herzberg.



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