5 Options For Money Left Over In College 529 Plans
If your child graduates from college and you are fortunate enough to still have a balance in their 529 college savings account, what are your options for the remaining balance? There are basically 5 options for the money left over in college 529 plans.
If your child graduates from college and you are fortunate enough to still have a balance in their 529 college savings account, what are your options for the remaining balance? There are basically 5 options for the money left over in college 529 plans.
Advanced degree for child
If after the completion of an undergraduate degree, your child plans to continue on to earn a master's degree, law school, or medical school, you can use the remaining balance toward their advanced degree.
Transfer the balance to another child
If you have another child that is currently in college or a younger child that will be attending college at some point, you can change the beneficiary on that account to one of your other children. There is no limit on the number of 529 accounts that can be assigned to a single beneficiary.
Take the cash
When you make withdrawals from 529 accounts for reasons that are not classified as a "qualified education expenses", the earnings portion of the distribution is subject to income taxation and a 10% penalty. Again, only the earnings are subject to taxation and the penalty, your cost basis in the account is not. For example, if my child finishes college and there is $5,000 remaining in their 529 account, I can call the 529 provider and ask them what my cost basis is in the account. If they tell me my cost basis is $4,000 that means that the income taxation and 10% penalty will only apply to $1,000. The rest of the account is withdrawn tax and penalty free.
Reserve the account for a future grandchild
Once your child graduates from college, you can change the beneficiary on the account to yourself. By doing so the account will continue to grow and once your first grandchild is born, you can change the beneficiary on that account over to the grandchild.
Reserve the account for yourself or spouse
If you think it's possible that at some point in the future you or your wife may go back to school for a different degree or advanced degree, you assign yourself as the beneficiary of the account and then use the account balance to pay for that future degree.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Who Pays The Tax On A Cash Gift?
This question comes up a lot when a parent makes a cash gift to a child or when a grandparent gifts to a grandchild. When you make a cash gift to someone else, who pays the tax on that gift? The short answer is “typically no one does”. Each individual has a federal “lifetime gift tax exclusion” of $5,400,000 which means that I would have to give
This question comes up a lot when a parent makes a cash gift to a child or when a grandparent gifts to a grandchild. When you make a cash gift to someone else, who pays the tax on that gift? The short answer is “typically no one does”. Each individual has a federal “lifetime gift tax exclusion” of $13,990,000 which means that I would have to give away $13.99 million dollars before I would owe “gift tax” on a gift. For married couples, they each have a $13.99 million dollar exclusion so they would have to gift away $27.98M before they would owe any gift tax. When a gift is made, the person making the gift does not pay tax and the person receiving the gift does not pay tax below those lifetime thresholds.
“But I thought you could only gift $19,000 per year per person?” The $19,000 per year amount is the IRS “gift exclusion amount” not the “limit”. You can gift $19,000 per year to any number of people and it will not count toward your $13.99M lifetime exclusion amount. A married couple can gift $38,000 per year to any one person and it will not count toward their $27.98 million lifetime exclusion. If you do not plan on making gifts above your lifetime threshold amount you do not have to worry about anyone paying taxes on your cash gifts.
Let’s look at an example. I’m married and I decide to gift $20,000 to each of my three children. When I make that gift of $60,000 ($20K x 3) I do not owe tax on that gift and my kids do not owe tax on the gift. Also, that $60,000 does not count toward my lifetime exclusion amount because it’s under the $38,000 annual exclusion for a married couple to each child.
In the next example, I’m single and I gift $1,000,000 my neighbor. I do not owe tax on that gift and my neighbor does not owe any tax on the gift because it is below my $13.99M threshold. However, since I made a gift to one person in excess of my $19,000 annual exclusion, I do have to file a gift tax return when I file my taxes that year acknowledging that I made a gift $981,000 in excess of my annual exclusion. This is how the IRS tracks the gift amounts that count against my $13.99M lifetime exclusion.
Important note: This article speaks to the federal tax liability on gifts. If you live in a state that has state income tax, your state’s gift tax exclusion limits may vary from the federal limits.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Should I Gift A Stock To My Kids Or Just Let Them Inherit It?
Many of our clients own individual stocks that they either bought a long time ago or inherited from a family member. If they do not need to liquidate the stock in retirement to supplement their income, the question comes up “should I just gift the stock to my kids while I’m still alive or should I just let them inherit it after I pass away?” The right answer is
Many of our clients own individual stocks that they either bought a long time ago or inherited from a family member. If they do not need to liquidate the stock in retirement to supplement their income, the question comes up “should I just gift the stock to my kids while I’m still alive or should I just let them inherit it after I pass away?” The right answer is largely influenced by the amount of appreciation or depreciation in the stock.
Gifting Stock
When you make a non-cash gift such as a stock, house, or even a business, the person receiving the gift assumes your cost basis in the assets. They do not receive a “step-up” in basis at the time the gift is made. Example, I buy XYZ Corp stock in 1995 for $10,000. In 2017, those shares of XYZ are now worth $100,000. If I gift them to my kids, no one owes tax on the gift at the time that the gift is made but my kids carry over my cost basis in the stock. If my kids hold the stock for 10 more years and sell it for $150,000, their basis in the stock is $10,000, and they owe capital gains tax on the $140,000 gain. Thus, creating an adverse tax consequence for my kids.
Inheriting Stock
Instead, let’s say I continue to hold XYZ stock and when I pass away my kids inherited the stock. If I pass away in 10 years and the stock is worth $150,000 then my kids receive a “step-up” in basis which means that their cost basis in the stock is the value of the stock as of the date of my death. They inherit the stock at $150,000 value, sell it the next day, and they owe $0 in taxes due to the step-up in basis upon my death.
In general, if you have assets that have low cost basis it is usually better for your heirs to inherit the assets as opposed to gifting it to them.
The concept is often times reversed for assets that have depreciated in value…..with an important twist. If I purchase XYZ Corp stock in 1995 for $10,000 but in 2017 it’s only worth $5,000, if I sold the stock myself I would capture the realized investment loss and could use it to offset investment gains or reduce my income by $3,000 for the IRS realized loss allowance.
Here is a very important rule......
In most cases, do not gift a depreciated asset to someone else. Why? When you gift an asset that has depreciated in value the carry over basis rules change. For an asset that has depreciated in value, the carry over basis for the person receiving the gift is the higher of the fair market value of the asset or the cost basis of the person making the gift. In other words, the loss evaporates when I gift the asset to someone else and no one gets the tax advantage of using the realized loss for tax purposes. It would be better if I sold the stock, captured the investment loss, and then gifted the cash.
If they inherit the stock that has lost value there is no value to the step-up in basis because the stock has not appreciated in value.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
