529 plans can offer wealth transfer benefits beyond helping pay for education expenses.
When it comes to saving for higher education, few tools are as popular as 529 plans.
529 plans are popular, in part, for their tax advantages. “There are very few investments that allow potential growth and distributions to occur federal tax-free,” explains Bob Petix, senior wealth strategist for Wells Fargo Wealth & Investment Management. “That makes 529 plans very attractive for parents who are committed to saving for college for their children.”
Here are five items to consider for your 529 gifting strategy.
1. Gift tax exclusion
The federal gift tax annual exclusion is currently $18,000 per individual ($36,000 for married couples) for 2024. The annual gift tax exclusion allows parents and grandparents to make lump-sum gifts to their children and grandchildren without incurring wealth transfer taxes or using their lifetime exemption amounts.
These gifts can be contributed to 529 plans, where they have the potential to grow and be distributed federal income tax-free. “There’s no limit to using the annual exclusion, so you could essentially transfer, as a couple, $36,000 per year into each child’s or grandchild’s 529 plan, which is a great way to give those funds a head start on growth,” says Petix.
2. Accelerated giving
Not only can donors contribute the annual exclusion gift amount to a 529 plan, but they can also superfund a plan with a five-year lump-sum contribution.
“A married couple could contribute $180,000 to a 529 plan in 2024, and it would count as the federal gift tax annual exclusion over the next five years,” says Petix. “And they can do that for multiple 529 plans for different beneficiaries. For parents or grandparents who have many children and grandchildren, it can be a great way to contribute excess cash into an income-tax-free investment account.”
3. Reduce taxable estate
529 plans can play a role in estate planning. By maxing out contributions for children or grandchildren, affluent contributors can reduce the size of their estates in order to fall below the estate tax threshold.
“This year, the estate tax threshold is $13.61 million per individual or $27.22 million per couple. If you’re on the cusp of that limit, making lump-sum contributions to 529 plans can be one way to reduce your taxable estate,” Petix explains. “That strategy could prove useful to even more people if those limits are cut in half with the potential expiration of the Tax Cuts and Jobs Act at the end of 2025.”
4. Grandparent-owned 529 plans
The Department of Education now allows applicants to receive federal financial aid based solely on federal income tax returns. This change means that 529 plans owned by a nonparent, including grandparents, friends, or other relatives, will no longer negatively affect federal financial aid eligibility.
Petix says this is a significant change that can make 529 plans more appealing for grandparents who want to help offset the cost of higher education for their grandkids.
“Grandparents typically have more resources than parents, and they want to help out their children and grandchildren,” he says. “I’ve seen grandparents who establish 529 plans every time a grandchild is born. With this change, it’s even more impactful, as those funds won’t affect financial aid.”
5. Roth IRA rollover
Funds in a 529 plan have to be used for qualified education expenses. But what if there’s money left over after all educational needs have been met? You could withdraw the funds with a penalty or change the beneficiary to another eligible family member. And now, there’s a third option.
“You have the ability to make a direct rollover contribution of remaining 529 plan funds to a Roth IRA for the beneficiary without penalty,” Petix says, citing a 2024 update to the rules. “This can be helpful if you overfund the account, if your child doesn’t choose higher education, or if your child finds other ways to pay for school. There are complex rules and limits surrounding this opportunity; your tax advisor can help you navigate those issues.”
Do 529 plans fit into your plans?
Investing in a 529 plan is just one way to save for education, but it can offer a number of wealth transfer benefits that are appealing to many investors.
“The primary objective for 529 plans is to fund education, but they do create a favorable situation for parents and grandparents who value education and want to lower the value of their estate in a tax-efficient manner,” says Petix. “As with any savings plan, you want to take advantage of growth and time. A financial advisor can help you decide whether a 529 plan can fit into your long-term estate planning.”
Gifting to a 529 plan can be an important tool for funding education and also for teaching children valuable financial skills. Explaining how a 529 plan helps save for education provides an opportunity to discuss tax advantages, set goals for budgeting and saving for college costs, discuss investment basics, and involve them in planning for the future in alignment with your family’s values for education.
Please consider the investment objectives, risks, charges and expenses carefully before investing in a 529 savings plan. The official statement, which contains this and other information, can be obtained by calling your financial advisor. Read it carefully before you invest.
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
