Account Limitations
There is no income ceiling limiting who may make contributions to a 529, and the owner does not have to have earned income to contribute to a 529. That being said, most states do limit the total amount of money that may be set aside from all sources for a single beneficiary. In other words, most states allow multiple individuals to open a 529 for one beneficiary; however, the total value of all such accounts for that particular beneficiary may not exceed a certain dollar amount.
Contributions are treated as completed gifts for gift tax and generation-skipping tax purposes. All contributions qualify for the $13,000 annual gift tax exclusion. This exclusion allows any person to give up to $13,000 in property as a gift to any other person. An individual can give as many of the “$13,000 gifts” as he or she chooses to different individuals, whether related or not, and not have to worry about gift tax. Furthermore, a married couple may gift up to $26,000 (the IRS considers it a gift of $13,000 from each spouse) to another individual without gift tax issues. So, in other words, you may contribute up to $13,000 to a 529 on behalf of any other person and you do not have to pay any gift tax on the contribution.
Since these contributions are considered a completed gift, some allow you to reduce the value of your estate for estate tax purposes each and every time you make a contribution. Since any person can own a 529 for the benefit of any other person, a grandparent can open and contribute to a 529 for his or her grandchild, which can serve as an effective way to begin reducing the value of his or her estate while putting the money to good use.
The tax code does give you an incentive to make higher upfront contributions. If you make a contribution between $13,000 and $65,000 for a beneficiary in one year, you may elect to treat the contribution as made over a five-calendar-year period for gift tax purposes. This provision allows you to make a substantial contribution in one year and still be able to avoid gift tax issues by making the election.
Federal Financial Aid Impact
When applying to college, the Free Application for Federal Student Aid (FAFSA) utilizes a formula to determine a student’s Expected Family Contribution (EFC), or what the family should be able to contribute (each individual educational institution may have its own “institutional methodology” to determine what a student’s family can contribute and such a method may differ completely from the federal model). The formula takes into account assets and income of both the student and the student’s parents. While the formula is very complex, we do know that certain assets are weighted differently.
Parental assets are assessed at a maximum rate of 5.64 percent in determining the student’s EFC. Under current law, assets owned by the student are assessed at a 20-percent rate in determining the student’s EFC. Therefore, it is much more beneficial for a student’s parents to own the account, as the parents’ assets are assessed at a substantially lower rate than the student’s.
If a grandparent owns the account, it is not reported as an asset on the FAFSA. However, any money withdrawn from a grandparent-owned 529 must be reported as student income on the following year’s FAFSA, even though the distributions are not included in the student’s income for federal income tax purposes.
Conclusion
While 529s do have certain disadvantages, and while there are other college savings plans available, 529s are typically the most versatile of the available options. Again, there is no best plan, as the best plan for one person may not be the most efficient plan
for another person.
In the end, if your goal is to help your children pay for at least a portion of the ever-increasing college expenses, a 529 is a great tool to achieve your desired end, meet your goals and gain some tax benefits along the way.
Very important tips thanks for sharing.