Tax Benefits | Capital Group

Lower your tax burden and help your grandchildren. It's a win-win.

Smart estate planning can offer tax benefits for you now and lighten the load for your grandchild later. Find out how to incorporate a 529 education savings plan into your financial plan — and be smart about how, when and how much to contribute.

Older man carrying child on his shoulders

Key takeaways

  • Know how to contribute to your grandchild's 529 savings plan.
  • Understand the tax consequences and benefits of making contributions to a 529 savings plan.
  • Find out how contributions could affect your grandchild’s financial aid eligibility.

Making a 529 savings plan contribution is a win-win.

When you make a contribution to your grandchild's 529 savings plan, he gets money for college and you get a tax benefit.

Giving to a 529 savings plan can benefit your estate planning.

Contributions to a 529 savings plan are treated as gifts, which means they also qualify for the annual gift-tax exclusion.

Here’s the breakdown on contributions:

  • You can make sizable investments or transfer significant assets out of an estate, including up to $15,000 a year ($30,000 for married couples) per beneficiary without gift-tax consequences.

  • Under a special election, you can combine multiple years into one contribution of up to $75,000 ($150,000 for married couples) without gift-tax consequences.

  • Lump-sum contributions can be applied to multiple beneficiaries, so you can share the the wealth amongst multiple grandchildren.

  • You can also make smaller contributions throughout the year. As long as they don't add up to more than $15,000 per beneficiary, the same rules apply.

While the tax benefits are great, the impact these funds can have on your grandchild’s future education are even better. A few ways this can help:

  • The flexibility of a 529 savings plan extends to tuition for college, trade school, study-abroad programs, supplies and more.

  • Every little bit helps. Every dollar that a student can use from a 529 savings plan is one less dollar they have to take out in student loans.

  • Sharing in funding education can be bonding for families; what a beautiful gift to pass on to your children and grandchildren. They’ll thank you for it!

How to make a contribution.

In most cases, family and friends can easily make contributions to a 529 savings plan. Still, there are a few things you should research before opening your wallet:

  • If you have the account number, you can send in a check or even make direct deposits.
  • Surprise your grandchild with an added contribution on birthdays and holidays — annual gifts can make a big boost to the balance over time.
  • Check with your son or daughter, and even your financial advisor, to make sure your contributions are timely. If your grandchild is nearing college and in the process of applying for financial aid, contributions can affect eligibility.
  • Some states might not accept third-party contributions to 529 savings plan. If that’s the case, talk to the account owner to figure out the best way to handle your contributions.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and CollegeAmerica Program Description, which can be obtained from a financial professional and should be read carefully before investing. CollegeAmerica is distributed by American Funds Distributors, Inc. and sold through unaffiliated intermediaries. 

Depending on your state of residence, there may be an in-state plan that provides state tax and other state benefits, such as financial aid, scholarship funds and protection from creditors, not available through CollegeAmerica. Before investing in any state's 529 plan, investors should consult a tax advisor. 

If withdrawals from 529 plans are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. State tax treatment of K-12 withdrawals varies. Please consult your tax advisor for state-specific details.

American Funds Distributors, Inc., member FINRA.

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.