Not only are 529 college savings plans income-tax free, if the proceeds are used for higher education, they also offer gift and estate tax benefits. Money contributed to a 529 account is considered a gift from you to the plan beneficiary.
Moreover, contributions to 529 plans are eligible for the annual gift tax exclusion. In 2002, you can give away up to $11,000 worth of assets to any number of recipients, tax-free, because of this exclusion; for married couples, the limit is $22,000 per recipient.
What’s more, special tax rules apply to 529 accounts. You can make up to five years’ worth of gifts upfront. Gifts in excess of $11,000 or $22,000 can be spread over more than one year, if you make an election on a gift tax return.
For example, you and your spouse can put $110,000 into a 529 plan for a youngster this year, tax-free, if you elect to spread this gift over five years. You must file gift tax returns each year to complete the transaction.
In addition, you still exercise considerable control over assets that have been moved beyond the reach of estate tax. You can even take the money back, if needed, although you’ll have to pay tax and a 10 percent penalty on any earnings.
