Annual contribution limit for 529 plans
In 2019, many families are trying to make the most of their tax-advantaged savings accounts. Those saving for retirement may deposit up to $6,000 to an IRA or Roth IRA ($7,000 if you're over age 50) and up to $19,000 to an employer-sponsored 401(k). But what about college funds? That's where it can get tricky, since the IRS doesn't specify an annual contribution limit for 529 plans and many 529 plans offer high total contribution limits.Most families won’t have to worry about hitting their 529 plan’s contribution limit this year, but there are some rules to be aware of if you're considering making a large deposit.
Annual gift tax exclusion
One of the many benefits of saving for a child's future college education with a 529 plan is that contributions are considered gifts for tax purposes. In 2019, gifts totaling up to $15,000 per individual will qualify for the annual gift tax exclusion, the same as in 2018 and up from $14,000 in 2017. This means if you and your spouse have three grandchildren (or children) you can jointly give $90,000 without gift-tax consequences, since each child can receive $15,000 in gifts from you and $15,000 in gifts from your spouse. Remember, the annual gift tax exclusion amount also includes non-529 gifts so be sure to include any cash or property gifts in your total.If your total gifts to an individual will be more than $15,000 this year, the excess amount will count against your lifetime estate and gift tax exemption and will have to be reported on Form 709 when you file your taxes. In 2019 individuals can gift up to $11.4 million without having to pay federal estate or gift tax. There is no joint gift-tax return, so you and your spouse will each have to file separately.
The 5-year election
Individuals may contribute as much as $75,000 to a 529 plan in 2019 if they treat the contribution as if it were spread over a 5-year period. The 5-year election must be reported on Form 709 for each of the 5 years. For example, a $50,000 529 plan deposit in 2019 can be applied as $10,000 per year, leaving $5,000 in unused annual exclusion per year.This is often called 5-year gift tax averaging or superfunding.
This is often a great estate-tax planning strategy for parents and grandparents. They're able to shelter a large amount of assets from estate taxes, while retaining control of the funds in the 529 account. However, if you do end up changing your mind down the road and revoking the funds in the account they will be added back to your taxable estate.
