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We're Invested

Retirement, investments, financial planning for every stage of life—learn about it all here at Invested,
a blog from your Wealth Management Advisors at Kirtland Financial Services.

Can I Open a 529 Plan Account with a Lump Sum?

By Kirtland Financial Services


Yes, although you will want to consider both the plan’s limit and the gift tax rules. Every plan has a lifetime contribution limit; in the majority of states, this limit is at least $350,000.

As a donor to a 529 account, you can contribute up to $15,000 per year, per beneficiary with no gift tax problems. This is the amount of the annual gift tax exclusion in 2021. If you are married, your spouse can also contribute up to $15,000. So the two of you could contribute $30,000 to without any gift tax concerns.

Although $15,000 per year is the limit for tax-free gifts, you can actually “front load” a 529 account by contributing five times the annual exclusion amount — or $75,000 per beneficiary ($150,000 for joint gifts) — and avoid federal gift tax by making a special election on your tax return to treat the gift as if it were made evenly over a five-year period. In effect, you are making five $15,000 contributions all at once. So, you can’t make any more $15,000 contributions over the next five years for that same beneficiary without owing a gift tax. But in effect, two parents (or grandparents) could fund an account for one child with $150,000 all at once and not trigger gift tax.

However, just because you might trigger gift tax doesn’t mean you’ll owe it. Any amounts contributed in excess of $15,000 per year (after any “front loading” as previously described) count toward an individual’s lifetime exclusion amount, which is $11,700,000 in 2021. Once you exceed that amount, gift taxes must be paid. (But any time you exceed the $15,000 amount in a year, you must file IRS Form 709 (the federal gift tax return) at the same time as your income tax return.)

529 accounts must be funded with cash only. So if your lump sum is coming from a potential sale of appreciated securities (e.g., stocks), keep in mind you’ll owe capital gains taxes. You may want to consult your tax advisor before making a decision.

Also, if you’re in a state that allows a state tax deduction for 529 plan contributions, you may want to avoid a lump-sum contribution and make annual contributions instead. This approach lets you qualify for the state tax break in future years.

Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal professional. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

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