However, the majority of families will not have to pay taxes when changing a 529 plan beneficiary from a grandparent to a grandchild. Up to $15,000 per year ($30,000 if married) qualifies for the annual GST exclusion, and up to $11,180,000 per individual qualifies for the lifetime gift tax exemption.
Full Answer
Can a grandchild be a beneficiary of a 529 plan?
Contributing to a 529 Plan with Grandchild as Beneficiary Contributions to a 529 plan are considered a gift to the beneficiary and individuals can gift $15,000 annually ($30,000 if married) to the 529 gift-tax free based on 2021 annual exclusion amounts.
How much should I withdraw from my child's 529 plan?
You take a $55,000 withdrawal from her 529 account, which includes $10,000 of account earnings. You use the money to cover the $25,000 of adjusted education expenses plus transportation expenses, pizza, incidentals, and a car to reward your daughter for all the free money she got.
Are grandparent owned 529 plans a blessing or a curse?
Grandparent owned 529 plans are a blessing when it comes to paying for college expenses, but they could be a curse when it comes to financial aid. When a parent owns the 529, up to 5.64% of the account value is included on the FAFSA, but distributions from the account are not counted.
Do the Feds know when you withdraw from a 529 plan?
So, the Feds know that a withdrawal was taken and that there may be tax consequences. When withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. This little-known truth can be an unpleasant surprise. Box 1 of the 1099-Q shows the total amount withdrawn from the 529 account during the year.
Is a 529 contribution a gift to the owner or beneficiary?
Parents and grandparents may read about the gift tax and worry that they'll face a penalty for contributing to a loved one's 529 college savings plan. After all, a contribution to a 529 plan is considered a gift from the donor to the beneficiary, even if the donor is also the account owner.
Can a 529 beneficiary also be the owner?
A. Yes. Since only one account owner can be named per account, family members may choose to open their own account for the same beneficiary.
Does beneficiary pay taxes on 529 plan?
Distributions from a 529 plan may be paid directly to the educational institution, to the beneficiary or to the account owner. Either the account owner or the beneficiary will have to pay income tax on the earnings portion of a non-qualified distribution plus a 10% tax penalty.
Can grandparents take tax deduction for 529?
Yes, grandparents can claim the deduction for contributing to a 529 if they live in one of the 34 states that offer a state income tax deduction for 529 college-savings plan contributions. The only question is whether you must own the account or whether you can contribute to one set up by, say, the child's parents.
Can grandparent transfer 529 to parent?
If you'd prefer to play it safe, grandparents can always transfer ownership of the 529 to the parent if allowed by their plan. A grandparent can transfer ownership of 529 funds to a parent 529 in the same state. Or grandparents can make contributions directly to the parent-owned 529 plan.
Is transferring ownership of a 529 a taxable event?
If you change ownership of the account more than one time in a 12-month period, the transaction would be considered a nonqualified distribution and would require you to pay a penalty, as well as federal income tax.
How can I avoid paying taxes on 529 withdrawals?
5 tips for a tax-free 529 plan withdrawalCalculate your qualified expenses. ... Decide which account to use. ... Match your 529 plan withdrawal to qualified education expenses. ... Make the distribution payable to the beneficiary. ... Evaluate any leftover funds.
Should 529 distributions go to parent or child?
Typically, parents as owners of 529 plans get the most favorable treatments, so ideally the custodial parent should own the 529 plan. If non-custodial, non-married parents, living separately or relatives (such as grandparents) own the 529 plan, then the assets are generally not listed on the FAFSA form.
Can a child be the owner of a 529 plan?
While the student is a minor, the account must be managed by a custodian (typically a parent or grandparent) until the student comes of age (typically 18 or 21 years old, depending on the applicable state law). A custodian of a custodial 529 account differs from an account owner in an individual 529 account.
Is it better for a parent or grandparent to own a 529 plan?
This is not likely to change under the new rules, as these private institutions could still impact your child's financial aid. Overall it is an excellent idea for a grandparent to open up a 529 plan for their grandchild. One of the benefits is that the grandparent can have more control of the money.
Can 529 beneficiary be changed from a child to grandchild?
If a grandparent owns the account for the benefit of a grandchild, they can change the beneficiary to another grandchild, a grandniece or nephew, or the child's parents, without tax consequences. They must, however, follow the gift tax rules detailed in the generation-skipping transfer tax.
What happens to a 529 when the owner dies?
If you were to die or become legally incapacitated, the successor account owner assumes all rights and responsibilities for the 529 account. The successor can be, but does not have to be, a spouse. (A very small number of 529 plans permit spouses to establish the account as joint owners.)
What is a 529 Q?
For any tax year when a 529 distribution is made, the 529 plan custodian will issue a 1099-Q to report the distribution to the IRS. The individual noted as the recipient on the 1099-Q is responsible for either demonstrating that the funds were qualified distributions or including the distributions on his or her tax return ...
What happens if you exceed your beneficiary's adjusted qualified education expenses?
If your total distributions for that beneficiary exceed that beneficiary’s total adjusted qualified education expenses, then you will likely owe tax and maybe a penalty. The excess distributions beyond the adjusted qualified expenses are the non-qualified distributions from which you will calculate the taxable portion.
What is the numerator of a qualified education expense?
The numerator (top part) is the adjusted qualified education expenses paid during the year and the denominator (bottom part) is the total amount distributed during the year. Subtract the amount figured in (1) from the total distributed earnings. The result is the amount the beneficiary must include in income.
What is 10% additional tax?
The 10% additional tax doesn’t apply to the following distributions. Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Made because the designated beneficiary is disabled.
Does QTP have to be included in income?
As Publication 970 states, “The part of a distribution representing the amount paid or contributed to a QTP doesn’t have to be included in income . This is a return of the investment in the plan.”. IRS Publication 970’s instructions for this calculation are: Use the following steps to figure the taxable part.
Do you subtract tax free education?
This means that after calculating all of your qualified education expenses, you need to subtract any tax-free educational assistance received from that number.
Who will receive a 1099 Q?
Otherwise, the account owner will receive the 1099-Q. In the case at hand, the reader says that the 529 funds were distributed to the beneficiary directly which ...
Withdrawal Options
There are several ways to access the money in a Sec. 529 account. You can have the withdrawal check issued in the name of the Sec. 529 account beneficiary or have an electronic funds transfer made into the bank account of the Sec. 529 account beneficiary — the student for whom the Sec.
To Tax or Not to Tax?
For any year in which a withdrawal is taken from a Sec. 529 college savings plan, the plan must issue a Form 1099-Q, "Payments from Qualified Education Programs," by February 1 of the following year. If the withdrawal payment is made to the Sec.
Case in Point
Here's an example to show how this formula works: Sam has $45,000 of college expenses. She receives $30,000 in tax-free scholarships and tuition discounts, so her adjusted qualified education expenses are only $15,000.
Not as Easy as ABC
As you can see, the federal income tax treatment of Sec. 529 account withdrawals isn't necessarily simple. Contact your tax advisor if you have questions or want more information.
When do you get a 1099 Q?
For any year in which a 529 account withdrawal is taken, the plan must issue a Form 1099-Q (Payments From Qualified Education Programs) by February 1 of the following year. If the withdrawal check is made out to the 529 account beneficiary or the college for the benefit of the beneficiary, the 1099-Q comes to the beneficiary.
Is a qualified withdrawal tax free?
Qualified withdrawals, as defined by our beloved Internal Revenue Code, are always federal-income-tax-free. And usually state-income-tax-free too. However, not all withdrawals are qualified withdrawals. So, there can be unexpected tax consequences.
Is a 529 a qualified withdrawal?
529 plans are a popular college savings tool. However, not all withdrawals are qualified withdrawals, and there can be unexpected tax consequences. ANDREW CABALLERO-REYNOLDS/AFP via Getty Images. Email icon.
Is a withdrawal from a 1040 taxable?
Some or all of withdrawn account earnings might be taxable, so the IRS will be interested to see what is shown on the recipient’s Form 1040. Withdrawn earnings are always federal-income-tax-free when total withdrawals for the year don’t exceed the account beneficiary’s adjusted qualified education expenses.
Can you withdraw money from a 529?
On the other hand, if you funded the 529 account with your own money, the money in the account actually belongs to you, and you can take a withdrawal for any reason you want. That said, beware of the tax implications explained later.
Do the Feds know if a withdrawal was taken?
So, the Feds know that a withdrawal was taken and that there may be tax consequences. “. When withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. This little-known truth can be an unpleasant surprise. ”.
What is generation-skipping transfer tax?
The generation-skipping transfer (GST) tax is a federal tax that is applied when property is transferred via gift or inheritance to a beneficiary who is at least 37½ years younger than the donor. Gifts, such as 529 contributions, made to a “skip person” (i.e., grandchild) are subject to a flat 40% GST tax in addition to gift taxes. Just remember that the annual GST amount is the same as the aforementioned annual exclusion amount of $15,000 per beneficiary ($30,000 if married).
Can a parent own a 529?
When a parent owns the 529, up to 5.64% of the account value is included on the FAFSA, but distributions from the account are not counted.
Can grandparents contribute to a 529?
By: Meredith Carbrey, CFP®. Contributions to a 529 Plan by grandparents can be a win for everyone – kids have additional funds for college and grandparents may get tax benefits. But be careful; there is more to it than just contributing. Do you know if contributions count as a gift or if the grandchild is a “skip person” or if it can hurt financial ...
Can you make a 529 gift over 5 years?
However, you cannot make any additional gifts to the beneficiary over that five-year time period. Taxpayers who take advantage of the five-year gifting option, must report one-fifth of the total 529 contribution for each of the five years. If the contributor dies within that five-year time frame, the pro-rata amount is included in ...
What is the federal tax rate for a 529?
Amounts that exceed the threshold may be subject to an estate tax rate of 18% to 40%. There is no federal inheritance tax. Contributions to a 529 plan are considered completed gifts for tax purposes, and the amount of the contribution is immediately removed from the donor’s taxable estate. 529 plan contributions up to the annual limit of $15,000 ...
How many states have 529 plans?
529 plans and state estate taxes. Thirteen states, including the District of Columbia, impose a state estate tax in addition to the federal estate tax. State estate tax exemption levels are significantly lower than the federal estate tax exemption, ranging from $1 million to over $5 million, which means estates that are not subject ...
What is estate tax?
An estate tax is based on the net worth of the decedent’s estate as of the date of death, and is paid by the estate. The estate tax is paid before anything is distributed to the heirs. An inheritance tax is based on the value of the bequest received by an heir, and is paid by the heir, unless the decedent’s will specifies ...
Which states have estate tax?
The states with a state estate tax include: Connecticut. District of Columbia. Hawaii. Illinois. Maine. Maryland (has both an estate tax and an inheritance tax) Massachusetts. Minnesota.
Can a grandparent contribute to a 529?
There is an exception if the donor superfunds a 529 plan and dies before the end of the five-year period. For example, if a grandparent contributed the maximum $75,000 and dies during the third year, ...
Does inheritance tax apply to a child?
Inheritance tax generally does not apply if the assets are inherited by a lineal descendent, such as a child or grandchild. Spouses are exempt from inheritance tax. For example, in New Jersey, if the inheritor is a spouse, child, grandchild, stepchild or mutually acknowledged child of the deceased they are not subject to inheritance tax.
Is a 529 plan considered a gift?
Since 529 plan contributions are treated as completed gifts and are not included in the donor’s gross estate for federal tax purposes, they are also not included in the donor’s gross estate for state estate tax purposes.
Who receives a 1099?
If someone other than the beneficiary receives a distribution (grandparent in this case), that person (the account owner) will receive a Form 1099 from the plan, that 1099 will report that the distribution was not made to the beneficiary.
Can an irrevocable trust take money back?
Owners of irrevocable trusts can never take the money back for themselves, but they decide when money is paid to the beneficiaries. As it relates to 529 plans, if the payment is made to the account owner, the earnings are subject to tax and the early withdrawal penalty applies (Sec 72).
Who is a beneficiary of a 529 plan?
According to the IRS, a member of a 529 plan beneficiary’s family includes the beneficiary’s: Son, daughter, stepchild, foster child, adopted child or a descendant. Father or mother or ancestor of either, stepmother, stepfather. A 529 plan beneficiary could also be changed to an ancestor of a stepfather or stepmother, ...
What happens if you change a beneficiary on a 529?
Changing a 529 plan beneficiary may result in generation-skipping transfer tax (GST) when the new beneficiary is two or more generations below the current beneficiary. For example, when a 529 plan beneficiary is changed from a grandparent to a grandchild the grandparent’s estate would be subject to the GST. A grandparent may have been named a 529 plan beneficiary if they opened a 529 plan account before the grandchild was born .
How many times can you rollover a 529 plan?
Families may also be able to avoid the twice per calendar limit on 529 plan investment changes and the one rollover per 12-month period limitations when the request is submitted with a beneficiary change request.
How much does a 529 plan cost?
Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s higher education expenses, and state aggregate 529 plan balances range from $235,000 to $529,000. The GST may also apply when grandparents contribute to a grandchild’s 529 plan.
What is a family member in a 529 plan?
The IRS provides a broad definition of family member, which includes the beneficiary’s blood relatives and relatives by marriage and adoption. It’s important to understand who qualifies as a member of the beneficiary’s family before you change your 529 plan beneficiary.
How much can a grandparent gift to a grandchild?
A grandparent may shelter up to $75,000 from estate taxes in a given year if they elect to treat the contribution as if it were made over a 5-year period. With 5-year gift tax averaging, each grandparent can gift up to $75,000 per grandchild.
Is a 529 distribution considered non-qualified?
Distributions used to pay for college expenses for anyone other than the designated beneficiary will be considered non-qualified, and subject to income tax and a 10% penalty on the earnings portion and possible recapture of state income tax benefits. Families may also be able to avoid the twice per calendar limit on 529 plan investment changes ...
Withdrawal Options
- There are several ways to access the money in a Sec. 529 account. You can have the withdrawal check issued in the name of the Sec. 529 account beneficiary or have an electronic funds transfer made into the bank account of the Sec. 529 account beneficiary — the student for whom the Sec. 529 account was set up, which is usually your child or grandchi...
to Tax Or Not to Tax?
- For any year in which a withdrawal is taken from a Sec. 529 college savings plan, the plan must issue a Form 1099-Q, "Payments from Qualified Education Programs," by February 1 of the following year. If the withdrawal payment is made to the Sec. 529 account beneficiary or the college for the benefit of the beneficiary, the 1099-Q comes to the beneficiary. If the payment is …
Case in Point
- Here's an example to show how this formula works: Sam has $45,000 of college expenses. She receives $30,000 in tax-free scholarships and tuition discounts, so her adjusted qualified education expenses are only $15,000. Sam's parents take a $45,000 withdrawal from her Sec. 529 account, which includes $6,000 in earnings. They use the money to cover the $15,000 of adjuste…
Not as Easy as ABC
- As you can see, the federal income tax treatment of Sec. 529 account withdrawals isn't necessarily simple. Contact your tax advisorif you have questions or want more information.