A 529 plan is a kind of investment account that lets families save money for college costs in the future. Many families use these accounts to help pay for tuition, books, and other school costs. but some may wonder can you donate a 529 plan to charity. The answer is no, which is too bad. If a distribution is made out to a charity, it may not be a qualified withdrawal, which could have a number of effects on your finances.
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The Consequences of Non-Qualified Distributions
When a distribution from a 529 plan isn't qualified, the earnings part of the distribution is subject to ordinary income tax and a 10% penalty. This can make a big difference in how much money the charity actually gets. Also, withdrawals that are not qualified may be subject to state income tax, and any state income tax benefits that were claimed may be taken back.
How The Tax Penalty Can Be Waived
There are times when the tax penalty can be avoided. The tax penalty won't apply to the amount a person got from a college savings plan for things like scholarships or help from their employer. The tax penalty won't apply to the cost of the person's education at a military school.
If the tax penalty doesn't apply, investing in a college savings plan will be the same as investing in a regular account. If the person dies or can't do normal things anymore, the tax penalty will also be taken away.
Why You Cannot Donate Leftover 529 Plan Money to Charity
529 plans are meant to pay for college costs, and withdrawals for anything else are not considered "qualified." Donating extra money to charity may seem like a good idea, but it could lead to financial problems that aren't worth the money you gave.
Non-Qualified Distributions
If a student gets a scholarship or goes to a U.S. Military Academy, the 529 plan account can take up to the amount of the tax-free scholarship as a non-qualified distribution. The part of the distribution that comes from earnings, on the other hand, is subject to ordinary income tax.
A Real-Life Example
Let's say that several years ago, married grandparents set up a 529 plan account for their grandson. They gave an initial gift of $150,000 and used 5-year gift-tax averaging to avoid having to report a gift that was subject to tax. When their grandson turns 18, the money in the account will be worth $230,000.
Their grandson applies to the U.S. Military Academy at West Point and is accepted, which surprises the grandparents. Now, his grandson asks, can you donate a 529 plan to charity? Since, each of the five military services academies gives its students free tuition, room and board, books, and medical and dental care. The grandparents are looking for good ways to use the money they saved in a 529 plan now that they don't need it.
Donating to Charity
The grandparents' 529 plan account could be given to the college where they met and studied. This way, they will be able to help students who need money to go to college and get a tax break for doing good. But the tax law does not support what they want to do. Under the current rules, a taxpayer can't just give a 529 plan account to a school or charity, even if the money is meant for a scholarship.
Options For Excess 529 Plan Funds
With a 529 plan, you can save money for more than just college. You can pay for things like books, housing, and computer equipment with the money. The money can also be used to pay for classes at any school that meets the requirements, not just colleges and universities.
You don't have to spend the money right away. You can let it grow tax-free in the plan. If you don't need the money, you can switch the person in your family who will use it. You can also spend the money on yourself if you decide to go back to school.
Making the Most Impact with Your Donation
Even though it may not be possible to give a 529 plan account to charity, there are still ways for families to make a difference with their extra money. One option is to take the money out of the account and give it directly to a charity that qualifies. This means the family can get a tax break for giving to charity and make a big difference with their donation.
You could also take the money and give it to the student in the form of a private scholarship. This lets the family give back to their community and help other students with the money left over from their 529 plan.
Blog Conclusion:
Donating a 529 college savings plan to a charity is a great way to help a cause you care about and might even help you save money on taxes. But before making a choice, it's important to think carefully about all the pros and cons of this option and to know what might go wrong.
We hope that the article on Can You Donate a 529 Plan to Charity has given you useful information and helped you decide if donating a 529 plan to charity is the right choice for you. Always, it's important to talk to a financial advisor or tax expert to figure out what the best thing to do is in your situation.
