Sunday, January 22, 2006

Gift Taxes and 529s

In response to a comment by one of the legions of followers of this blog, 529 plans have a unique benefit that allows for significant one time contributions without paying gift taxes. As with any gifts, $12,000 per year can be gifted to another individual tax-free ($24,000 for a married couple). For example, a couple can contribute up to $24,000 per granchild each year without generating tax implications for either side.

The benefit that is unique to 529s is that the same married couple can contribute $120,000 in one year to an individual, tax free. (Note that the maximum is $60,000 for an individual making the contribution). This amount would then be treated as if it had been contributed in equal payments over five years, and no further contributions can be made during that period if the full amount is contributed initially. This provides some handy estate tax benefits. Even though the contributor could be the account owner, and thus controller of the account, the gift reduces the estate by the amount contributed. It also allows the earnings on the investment to begin compounding tax free earlier than would otherwise be the case.