Estate and Income Tax Advantages of 529 Plans

Taking advantage of 529 plans is appropriate for parents and grandparents seeking to amass funds for run-away college tuition costs.  Contributions to a 529 plan are treated as gifts for tax purposes and the contributions qualify for the $14,000 annual gift tax exclusion.  Contributions can be pre-funded for five years, meaning $70,000 per parent.  Hence, funds in the 529 are removed from the donor’s estate faster than if contributions were made each year. 

For federal income tax tactics, the investment grows tax-free, and distributions to pay for the beneficiary’s college costs are tax-free. Keep in mind, state law can affect the state income tax treatment.

There are other advantages, such as the donor controls the funds in the 529.  The only disadvantage for 529’s is if an individual is relying on financial aid, the 529 can be considered an asset, depending on who set up the plan. 

See 529 Plans: Estate Tax and Income Tax Advantages, The National Law Review, Sept. 9, 2014.