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Incorporating College Savings in Your Gifting Strategy

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529 plans have become the most popular choice to save for college. They tend to have low minimum monthly investment amounts and provide tax-exempt withdrawals for education. In addition, many states even offer a deduction for contributions. Given the prevalence of 529 plans, it is important to understand how contributions to a 529 plan affect gifting limits.


How “gifting” works

529 contributions are considered gifts to the beneficiary. In 2015, the maximum one can gift before using some of their “gifting credits” is $14,000 per person, per year. This means that if you gift an amount above $14,000, you need to use some of your gift credits and file gift tax form 709 with the IRS. While the gift may not have an immediate tax impact, the average cost for a preparer to file this form may be substantial.

There are advantageous ways to gift more to a 529 plan than the annual exclusion amount. A married couple can double the $14,000 annual amount to $28,000. In Colorado, a check written from a joint account between spouses is deemed as joint contribution; therefore, one check can be made without triggering the Form 709 filing requirement. 529 plans also have a special rule that allows 5 years of forward gifting in one year, allowing an individual to accelerate up to $70,000 in contributions immediately, or double that amount for a couple. Note, however, that no other gifts to the same beneficiary can be made during the next 5 years, and the gift tax form must be completed to document the transaction.

A common pitfall can occur when the beneficiary of a 529 plan is changed. For example, consider the consequences of changing the beneficiary from child to grandchild. In this case, the new beneficiary is in a generation below in age and a generation-skipping gift of the entire account is deemed to have been made. A gift tax return would need to be filed if the account was over $14,000 in value and lifetime exclusion gifting credits may be used. To avoid this situation, make sure the new beneficiary is in the same generation as the previous beneficiary, such as a sibling.

529 plans are a great way to save for college, and seem fairly simple and straight-forward upon first glance; however, it’s important to understand potential pitfalls and consequences when making beneficiary changes or gifting larger amounts. Make sure to brush up on the rules or speak to your financial planner ahead of time.



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Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.

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