Tax consequences of liquidating 529


27-Aug-2017 17:15

When you make a gift to a 529 plan, the IRS considers that you have made a gift to the account beneficiary.Gifts to these plans qualify for the ,000 annual gift tax exclusion, so contributions can be a great way to utilize your annual exclusions.However, the proceeds from liquidation would wind up back in your estate and you would incur income taxes as well as a 10 percent penalty on the earnings.When the account owner has made the five-year gift tax election and dies before the period has expired, the unexpired contributions that can be allocated to the calendar year that begins after the death are included in the owner’s estate.

If you do more than one rollover in a 12-month period, you will pay a penalty and taxes if the beneficiary stays the same.

Here’s the best part: Contrary to conventional estate tax rules, contributions to a 529 plan are removed from your estate even though you retain control over all aspects of the account, including investment choices, beneficiary designations, and distributions.

You even have the flexibility to liquidate the account and take back the money.

In other words, the child would be deemed to have made a gift to the grandchild.

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Generation-skipping rules apply when the new beneficiary is two or more generations below the old beneficiary (e.g., a parent changes the beneficiary from a child to a great-grandchild).

You can make a lump sum contribution or contribute funds in monthly or annual installments.