What is the best legacy a grandparent can give? Many believe that the best gift is a brighter future through education. Depending on whether you are saving toward future college expenses or your grandchild is already enrolled, there are unique gifting considerations for grandparents wishing to help with the expense of a college education. Not only will you be helping give your grandchildren a firm foundation for the rest of their lives, but you could also be making a savvy tax-saving move.
If you are saving toward future college expenses, the benefits of a 529 College Savings Plan can be an excellent choice for many grandparents to make financial gifts because of its unique tax treatment. A 529 plan is a state-sponsored program that provides growth and distribution of earnings that are not subject to federal tax, and generally are not subject to state tax, as long as withdrawals are for qualified educational expenses. The 529 plan allows for:
· the selection of any accredited college, university, or vocational school;
· unused funds to be transferred to another family member;
· the grandparent to maintain control of the funds;
· generous contribution limits regardless of income level;
· the ability to select among investment strategies;
· contributions to be excluded from a taxable estate, and may not be subject to gift taxes.
You can gift up to the annual gift tax exclusion amount each year to anyone and not be subject to the gift tax. Under IRS rules, individuals can gift up to $18,000 per person per year without triggering the gift tax. For married couples, this exclusion doubles to $30,000 per person per year. The 529 plan has unique characteristics for gifting purposes: If your annual contributions for a single beneficiary exceed $18,000, you may make an election to spread the contributions over five years (20% per year) for gift-tax purposes. This means you can gift up to $90,000 per beneficiary ($180,000 for a married couple) into a 529 plan without generating a taxable gift assuming no other gifts are made during that time to that beneficiary.
Your attorney, accountant, or financial planner may have advised you to gift away assets as a way to reduce your estate tax. However, you may be reluctant to part with your money after a lifetime of hard work and uncertainty about the future. This is precisely why 529 plans are unique in that the value of the 529 account is removed from your taxable estate, yet you can retain full control over the account including the right to take the money back at any time. Few gifting alternatives offer this combination of control and estate reduction. (Note: Funds withdrawn from the plan would be subject to income taxes and the 10% penalty tax on earnings.) If your grandchild is already enrolled or will be enrolling soon, direct payment of tuition by a grandparent to a school is not considered a taxable gift, which can also help in managing estate taxes while leveraging the annual gift exclusion for other purposes.
With the introduction of the Secure Act 2.0, there’s an additional tax-efficient strategy available: rolling over funds from a 529 plan that has been maintained for at least 15 years into a Roth IRA for the child’s benefit. This rollover option allows for tax-free growth and withdrawals for retirement if the funds aren’t used for education, providing added flexibility and potential long-term benefits beyond traditional education funding. There are several restrictions on how this type of rollover can be done:
· The amount of the rollover is subject to the IRA contribution limit for that year
· The 529 plan must have been maintained for a minimum of 15 years
· The rollover must be made using funds that have been in the 529 plan for a minimum of 5 years
· There is a $ 35,000-lifetime maximum that a beneficiary can roll over
It’s a strategic move that can maximize tax advantages and support your grandchild’s financial future.
If a child doesn’t use all the funds in a 529 plan for educational expenses, there are several additional options available besides rolling the funds into a Roth IRA. Firstly, the account owner can leave the funds in the 529 plan where they continue to grow tax-deferred, available for future educational needs of the beneficiary or other family members. Alternatively, the funds can be used for qualified expenses at any accredited institution beyond the traditional college years, such as graduate school or vocational training. Another option is to change the beneficiary to another family member, ensuring the funds still serve an educational purpose within the family. Lastly, if none of these options are suitable, the account owner can withdraw the funds, though the earnings portion of non-qualified withdrawals may be subject to income tax and a 10% penalty.
By leveraging these strategies, grandparents can play a crucial role in securing their grandchildren’s educational future while potentially reducing estate taxes and maximizing tax efficiency. However, it’s essential to consult with your tax or legal advisor to determine the best approach based on your financial situation and goals.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with Waterworth Wealth Advisors, LLC, or any other entity listed.
Waterworth Wealth Advisors, LLC, Kestra Investment Services, LLC, and Kestra Advisory Services LLC, do not provide legal, tax, or accounting advice. Before making decisions with legal, tax, or accounting ramifications, you should consult appropriate professionals for advice that is specific to your situation.
