Can You Make a Tax-Free 529 Plan Contribution Larger Than the Annual Gift Tax Exclusion?

Although the IRS typically allows people to gift no more than $14,000 a year (2017 figure) to another person without a federal gift tax, you can contribute up to $70,000 to a 529 plan in one year. A special tax law allows you to aggregate five years of the allowable $14,000 annual gift-tax exclusion (5 x $14,000 = $70,000) to jump-start a 529 plan.

While you will not be able to make any further gifts to the 529 plan for the next five years, this strategy often has merit for donors who can afford it. Depending on the investment options that are selected, compounding can potentially make the earnings on a 529 account grow faster than if a donor invested $14,000 annually in each of the next five years.

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