College Saving Strategies: One-Time Gift or Monthly Contribution?

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Once you have calculated the funding requirements for your college savings goals, there are three strategies for funding the accounts.

Regardless of which you pick, we encourage parents to ensure that their own retirement is secure before turning attention to college planning. You can read more about the reasoning for this advice in our article “No One Will Loan You Money For Retirement.” In most cases, this would mean making sure that you can prioritize deferring into your retirement plan at work, contributing to your Roth IRA, and saving at least 15% of your take home pay.

If making a large contribution to your child’s 529 plan would jeopardize your ability to contribute to your own retirement savings, we would recommend utilizing a slower college savings strategy.

1. Annual Contributions

Contributions to 529 plans are considered gifts to the beneficiary on the account. There is an annual gift exclusion limiting how much one individual can gift to another individual without it being a taxable event or requiring any reporting. For 2024, the gift limit is $18,000.

Because the one-time funding numbers are often larger than this annual gift limit, it will normally take multiple years of this exclusion before the 529 funding is completed.

Making annual 529 contributions can be as easy as all the other annual contributions. You can automate them, do them at the same time each year, or decide from year to year how much you are going to contribute.

2. One-Time Funding

Congress has a special rule for 529 plans which permits gift givers to use 5-years of exclusion in one gift. Under this election, the contribution is spread evenly across the five years for the purpose of the annual gift exclusion.

This means that you cannot use up the first year’s annual exclusion unless you also give five times the exclusion amount. To illustrate this point, consider how a one-time gift of $90,000 in 2024 counts as $18,000 of each year’s annual exclusion from 2024 through 2028 while a one-time gift of $60,000 in 2024 counts as $12,000 of each year’s annual exclusion from 2024 through 2028.

This 5-year election is made for each unique individual-recipient combination. So if two spouses are both giving to their two children, each spouse can decide individually for each child whether they want to make the election. However, one spouse cannot make the election for some 529 gifts to the beneficiary without making the election for all 529 gifts to the beneficiary.

The election is made by using Form 709. On the tax year 2023 form, the election is Schedule A line B, “Check here if you elect under section 529(c)(2)(B) to treat any contributions made this year to a qualified tuition program as made ratably over a 5-year period beginning this year. See instructions. Attach explanation.”

For parents who are gifting assets to their children in multiple ways, the 5-year rule can require some extra planning. For example, if a parent wants to gift $2,000 to their child outright in 2024, a gift of $85,000 to the 529 plan in the same year exceeds the 2024 gift limits even under the 5-year election. This is because the $85,000 is spread evenly across the five years, putting $17,000 in 2024. This prorated amount combined with their cash gift is $19,000, higher than the 2024 gift exclusion.

For parents who are trying to gift the maximum available, the 5-year rule can also be a bit of a hassle. Imagine a parent gave $85,000 in 2023 when the annual gift exclusion was $17,000. This was the maximum 5-year gift they could give in 2023, but the annual gift exclusion has increased to $18,000 in 2024. Their 2023 5-year gift has only used $17,000 of that, so to maximize their giving, the parent would need to give another $1,000 in 2024 to top off their previous gift.

If, however, five years of the exclusion is greater than your one-time college funding targets, this election can make for easy funding.

3. Monthly Contributions

Monthly contributions make for an easily automated and flexible option. You can easily establish an automated direct transfer from your taxable account to your 529 plan, making college savings automatic.

Monthly contributions are an ideal choice for parents who have a funding goal they know they can commit to as well as stretch goals they will do if there is excess. They are also ideal for parents who might forget to make annual contributions or who do not have the excess cash to make large one-time gifts.

Coordinating with State Tax Deductions in Virginia

The above funding strategies assist in navigating the federal gift tax exemption rules, but they don’t navigate the unique rules that individual state’s qualified tuition programs or 529 plans may have.

For Virginia taxpayers, contributions to a Virginia 529 plan offer the account owner a Virginia state tax deduction.

For those over age 70, this deduction is not limited. The dollar amount of the state tax deduction is one-for-one with the dollar amount of the contribution.

However, for those under age 70, the deduction limit is $4,000 per account per year.

For example, a grandparent who contributes $90,000 to the child’s 529 plan in 2024 can receive a 2024 Virginia state tax deduction for the full $90,000.

Using the same funding example, a parent who contributes $90,000 to the child’s 529 plans in 2024 would need to have 23 unique 529 plans in order to receive a 2024 Virginia state tax deduction for the full amount. In practice, 23 unique 529 plans is normally more complexity than most parents would like. Fortunately, excess contributions beyond the deduction limitation are not lost. If a taxpayer contributes more than $4,000 per account during the taxable year, the taxpayer may carry forward any undeducted amounts until the contribution has been fully deducted.

However, perhaps easier still would be to utilize a slower annual funding strategy. Assuming a 2024 gift of $18,000, a parent can receive the full Virginia state tax deduction to the beneficiary’s 529 plans by using only 5 unique accounts.

This is one reason why Virginia grandparents are more likely to elect to use one-time funding choices whereas Virginia parents are more likely to choose annual or monthly contribution strategies. Regardless of which strategy is selected, the sooner a college savings plan is implemented the easier it is to fund your child’s college expenses.

We provide support for this process to clients through our 529 Management service, currently included at all of our service levels.

Photo by Jehyun Sung on Unsplash. Image has been cropped.

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.