Transfer 529 to adult child and pay tax

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shepherd
Posts: 54
Joined: Sun Aug 28, 2011 7:46 pm

Transfer 529 to adult child and pay tax

Post by shepherd »

Hi,

I'd like the group's thoughts on this approach. Assume you have unused 529 money and instead of saving for some future grandchild you transfer to your adult child during low/no income years. Then have them pay the penalty and tax. Any downsides? Also, if you have more than $15k, how to spread across years to keep within gift-tax exclusion limit?
lakpr
Posts: 7673
Joined: Fri Mar 18, 2011 9:59 am

Re: Transfer 529 to adult child and pay tax

Post by lakpr »

shepherd wrote: Wed Jun 09, 2021 9:07 pm Hi,

I'd like the group's thoughts on this approach. Assume you have unused 529 money and instead of saving for some future grandchild you transfer to your adult child during low/no income years. Then have them pay the penalty and tax. Any downsides? Also, if you have more than $15k, how to spread across years to keep within gift-tax exclusion limit?
Perfectly legal. The $15k figure you are talking about is only a threshold to *file a gift tax return*. It does not mean you owe any taxes. If you happen to gift more than $15k per year, all you would have to do is to file a gift tax return, but take a deduction against your lifetime gift exemption limit. That limit is currently $11.2 million. So if you happen to gift $100k to your adult child, you file some paperwork with the IRS choosing to offset $100k against the $11.2 million, so your remainder life time exemption limit = $11.1 million.

Bottom line: transfer of money below $15k = no need to even inform the IRS. Above that limit = inform the IRS but $0 owed in taxes
Normchad
Posts: 2475
Joined: Thu Mar 03, 2011 7:20 am

Re: Transfer 529 to adult child and pay tax

Post by Normchad »

Do you want the money to still be in a 529? Or do you just want the kid to have the money?

If you just want them to have the money, just make a distribution from the plan, directly to them.

If you want it to remain in a 529, just switch the owner. When I looked into years ago, it wasn’t clear if that was a taxable event or not. I would think not, since you are just transferring ownership of the account, to the beneficiary of the account.
bogcir
Posts: 81
Joined: Thu Jan 21, 2021 1:38 am

Re: Transfer 529 to adult child and pay tax

Post by bogcir »

Normchad wrote: Wed Jun 09, 2021 9:26 pm Do you want the money to still be in a 529? Or do you just want the kid to have the money?

If you just want them to have the money, just make a distribution from the plan, directly to them.

If you want it to remain in a 529, just switch the owner. When I looked into years ago, it wasn’t clear if that was a taxable event or not. I would think not, since you are just transferring ownership of the account, to the beneficiary of the account.
This sounds right. Assuming the adult child was the beneficiary. It’s already considered a completed gift to them.
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