Q. I have leftover money in my son’s 529 plan. What can I do with it? Also, one may give $15,000 to an individual, per year without triggering gift tax filings. How does this play with a 529 plan?
Let’s go over how 529 plans work.
A. These are a great questions.
In general, it can be anyone regardless of their relationship to the person who sets up the account, she said. It can even be you.
When you set up your 529 plan, you choose the beneficiary, said Jeanne Kane, a certified financial planner with JFL Total Wealth Management in Boonton.
“The only requirement is that the beneficiary must be a U.S. citizen or resident alien and have a Social Security number or federal tax ID number,” she said. “Only one beneficiary is named per 529 plan.”
If you have leftover funds in a 529 plan after the beneficiary goes to school — or if the beneficiary never attends college — you have several options for the money.
First, you can just take it out, but you would be responsible for paying taxes on the gains in the account as well as a 10% penalty, Kane said. Or you can change the beneficiary on the 529 plan.
She said there are no tax consequences or penalties when you change a 529 plan beneficiary to a qualified member of the beneficiary’s family. These are a spouse, child, stepchild, foster child, adopted child or a descendent, a son- or daughter-in-law, siblings or step-siblings and more. “If you need the money, you can take it,” Kane said. “You’re the owner of the funds and can use them as you see fit. However, you will take a hit from taxes and penalties.”
If you don’t need the money, she recommends you pick someone else in your family to benefit. “The cost of college is so expensive these days that there may be any number of relatives who would be extremely grateful for these funds,” she said.Now, to gifting.
In 2022, the annual gift tax exclusion allows you to gift $16,000 per year to an individual, she said. If you’re married, you and your spouse could gift $32,000 to an individual. The lifetime gift tax exemption is now $12.06 million per person. “Gift tax works like a cup and saucer,” she said. “The cup is your annual exclusion, and the saucer is your lifetime exemption.”
“There is a very small chance that you would ever have to pay gift tax,” she said. “You would need to have a very large estate and gift a large amount of money over your lifetime. Gift taxes are owed by the gift giver, not the recipient.” Kane said contributions to 529s are considered completed gifts for tax purposes from the donor to the beneficiary named on the account.