Using a 529 Plan to Pay for Your Child’s College
A Section 529 plan is a great way to fund your child’s college education. For income tax purposes, it works like this:
- no tax deduction for the money you put into the plan,
- tax-free growth inside the plan, and
- tax-free distribution when the money or prepaid tuition is used for college.
For gift-tax purposes, the 529 plan works like this: contributions to 529 plans are taxable gifts eligible for the annual gift-tax exclusion of $14,000 per donee (2017 amount), which doubles to $28,000 if your spouse consents to gift splitting.
The tax code contains a special option for 529 plans that allows you to spread the contribution over a five-year period so you can take advantage of the $14,000 annual exclusion. For example, you can contribute $70,000 to the 529 plan and use five years of the $14,000 exclusion to avoid any gift taxes. You and your spouse, with combined consent, could contribute $140,000 and use the five-year rule to avoid gift taxes.