Multiple donors can boost 529 savings

Question

Dear Joe, I have a 529 college savings account for my child. I personally funded the $12,000 maximum amount for 2007. In addition, my parents (my daughter's grandparents) wrote a check for $1,000 made payable and deposited directly into the same 529 account. So, we technically have $13,000 invested in the same 529 account for 2007. Is this a problem? Should the grandparents have opened their own 529 account as custodians for my daughter or is this OK as it stands? Additionally, my daughter's grandparents have written another check for $5,000 made payable to the same 529 account. -- Michael

Answer

Dear Michael,
No need to worry -- your contributions to the 529 plan are your gifts and the grandparents' contributions to the 529 plan are their gifts. This is true even when all of the contributions are made to the same 529 account.

Every individual making gifts has available a $12,000 annual exclusion for gift-tax purposes, applied on a per-donee basis. Based on your facts, neither you nor the grandparents have made gifts in excess of your annual exclusions.

However, remember to count up all your gifts during the year, not just your contributions to the 529 plan. Because you personally contributed $12,000 to the 529 plan, any other gifts made by you to your child during the year -- even if it's just $1 -- are required to be reported on the Form 709 gift-tax return. You don't actually pay gift tax until all reportable gifts over your lifetime exceed $1 million.

A special five-year election allows you to leverage the $12,000 annual exclusion when funding a 529 plan with more than $12,000 in any one year. The effect of the election (made on a Form 709) is to spread your contributions of up to $60,000 ratably over a five-year period for gift-tax purposes.

Congress created this election realizing that some parents and grandparents would look to fund their 529 accounts with more than $12,000 at a time.

The maximum contribution limit in 529 plans is very high, with plans cutting off contributions once the account reaches a specified level. In some plans, that total exceeds $300,000.