The Tax Blotter - April 2023 - Sec. 529 Plans Get Updates

The Tax Blotter is a brief roundup of recent tax news and cases.

A Section 529 plan is a tax-favored way to save for a child’s college education. Contributions can grow without any current tax while distributions to pay for qualified expenses like tuition are tax-exempt.

Juice up plan quickly. Contributions to a Section 529 plan are subject to gift tax, but may be sheltered from tax by the annual gift tax exclusion. For 2023, the exclusion for each gifter—say, a parent or grandparent—is $17,000 per recipient Special rule: You can chose to give up to five years worth of contributions in one shot without any gift tax liability. For example, you can make a one-time gift of $85,000 in 2023.

Extend a 529 account. Suppose you set up a Section 529 plan account for your oldest child. Now that child is graduating or has decided to not go to college. Suggestion: You can roll over the funds to an account for your younger child. The rollover is exempt from current tax if it is completed within 60 days. Alternatively, you can change the beneficiary designation on the initial account. Either way, your younger child benefits.

Arrange Roth rollover. Now let’s say that your youngest child is graduating from school. If funds are left over in their 529 account, new SECURE 2.0 Act provides another option: Beginning in 2024, the plan beneficiary can roll over funds tax-free to a Roth IRA, subject to the annual contribution limits. Among other requirements, the account must have been open at least 15 years. Plus, there’s a $35,000 lifetime cap on rollovers.