529 Contribution Limits

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529 Contribution Limits

Post by TCP » Tue May 31, 2016 8:42 am

I apologize for asking someone else to do my research but I did try.

I am trying to front load 529's for all 3 of my children (3 month, 20 months, and 3 1/2 years) as much as possible in order to get the maximum benefit of tax free growth. I live in VA and we get a full deduction of the state income tax (5.75%) so I use the VA plan as I get the deduction and it has great offerings through their inVest plan. To date I have funded 12k for each child for the year, and am looking to contribute another 4-8k per child in the next month or two. I was speaking with a friend and he said his tax attorney told him he would be subject to the gift tax on anything over 14k per year. I looked it up and found this on the IRS website:

"Q. Are there contribution limits?

A. Yes. Contributions can not exceed the amount necessary to provide for the qualified education expenses of the beneficiary. If you contribute to a 529 plan, however, be aware that there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed $14,000 during the year. For information on a special rule that applies to contributions to 529 plans, see the instructions for Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return."

I take this to mean that the IRS treats 529 contributions as gifts to the account beneficiary. Is this correct? The maximum yearly contribution to each account is 4k, so I have 3 different accounts, all under my name, for each child in order to contribute the 12k. My plan was to open a 4th (and possibly 5th) account for each child under my name in order to contribute the additional 4-8k. My question is would this trigger the gift tax? The money would be withdrawn from a joint checking account with my wife (married filing jointly) but the money would go into a 529 account with just my name on it. Can I contribute 28k since I am married filing jointly or do I have to create the new accounts in my wife's name to avoid the tax? Should I do that anyway just to be safe? It would be a pain to have 2 different logins with multiple accounts for 3 different children. I tried look it up and the IRS website and couldn't find it. I tried to call them and waded through endless automated menus and never got to a person before I was hung up on. I tried our local IRS branch and they were not helpful either. Also tried googling it but its a complicated issue that can't be searched very well with google. I did look at Form 709 and it was not helpful. So I ended up here, asking people who are smarter than me and probably much better at navigating the IRS website/taxcode. Thank you in advance for any help you might provide.

Maxing out 401k, IRAs, HSA.

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Re: 529 Contribution Limits

Post by mhc » Tue May 31, 2016 8:56 am

The answer you quoted regerenced a "special rule". You should look that up. I have not looked for a while, but you use to be able to do 5 years worth of gifting in one year. So between you and your spouse you could do 10 x $14k = $140,000 per child this year without worrying about the gift taxes.

I think if you google this, you should be able to find an article that explains it in detail. www.savingforcollege.com has explanations.

For most people, exceeding the gifting limit is not really a big deal.

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Re: 529 Contribution Limits

Post by Atgard » Tue May 31, 2016 9:29 am

mhc is right on both counts. Also, remember the "penalty" for exceeding the gift limit is that the excess is counted against your total estate tax deduction limit when you die. In other words, if you're married, you will owe zero dollars in estate tax if your estate is $10.9M or less (this increases each year, sometimes a lot depending on who is passing laws). IF you pay more than $14,000 to any one person in a year, the excess is deducted from that $10.9M. So if you give your kid $15,000 this year, you only get to die with $10,899,000 before you start paying estate taxes instead of $10,900,000.

If your estate is not going to be that large, there is no issue with giving your kids as much as you want whenever you want.

Additionally, you can also make unlimited payments directly to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift.

So, each parent can give each relative $14,000 per year, so $28,000 per year per relative every year of your life, plus pay for all their medical and educational expenses, plus an additional $10,900,000 either over the course of your life or when you die. And you owe $0 estate tax.

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Re: 529 Contribution Limits

Post by TCP » Wed Jun 01, 2016 10:21 am

Thank you both for your helpful answers. My "estate" will be nowhere near that so there won't be any issue there. "We" can contribute 28k per year per child to 529 even though my name is the only one on the account. I don't have the cash to put in a large lump sum and fully fund them now while taking the deductions over the next several years, but I do plan on socking away as much as I can each year while they are young. Thank you again for your help.

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Re: 529 Contribution Limits

Post by livesoft » Wed Jun 01, 2016 10:25 am

Isn't there a limit to state tax benefit? Say, only the first $5,000 per child per year?
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Re: 529 Contribution Limits

Post by NoVa Lurker » Wed Jun 01, 2016 10:50 am

livesoft wrote:Isn't there a limit to state tax benefit? Say, only the first $5,000 per child per year?

$4k per child per account, with unlimited carryforward to future years. My understanding is that you can't open two accounts with identical investment options for this purpose, but if you have, say, a stock account and a bond account for each of two children, you could put $4k in each of the four total accounts, and deduct $16k in that year.

I'm not an expert, so maybe others know better.

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Re: 529 Contribution Limits

Post by TCP » Wed Jun 01, 2016 11:04 am

NoVa Lurker is correct. It is 4k per account.

To be considered a separate account one of the following must be different.
1. Account owner (you can open an account for child A, and your spouse can open an account for child A)
2. Account beneficiary (you can open an account for child A and child B)
3. Different holdings in the account.

The third one is key. I put 4k, in Total Stock, Total International, Total Bond, Aggressive Fund and they are each considered separate accounts by the 529 and by the state of VA so I can deduct state income tax on all 16k, for each child. Each holding has a separate account number and I personally called and verified this with the 529 plan and VA dept of taxation and have not had any issues receiving the full deduction when filling out my taxes. Both turbotax and now this year, taxact, gave me the full deduction off of my state taxes.

There was an old thread on here where I learned about it and the person posted a link to the VA tax code, and I believe a court ruling showing that it was legal. I printed them both out to keep with my 529 folder just in case.

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