Exceeded 529 Contribution Limit! Please Help!

[hsingh2005]

I opened a 529 in NY for my daughter in 2012 and funded it with $27,000 from my checking account spread over several months to dollar cost average, basically going $1,000 in excess of the joint gift-tax exempt amount.

Ideally, and in hindsight, I would have liked to stay at $26,000 and claimed it as a joint amount contributed by both me and my wife. I am now trying to figure out what is the best course of action for me and my wife to minimize tax consequences and paperwork?

Please help!

[disneysteve]

Just to be clear, you didn't exceed the 529 contribution limit. For the NY plan, that limit is $375,000.

What you exceeded was the annual gift tax exemption amount of $13,000 per person. There might be a way to back out that extra $1,000. I'd suggest calling the 529 plan and explaining what happened.

If you can't get it out, you will probably need to file a gift tax return with your 2012 taxes. I would speak to your tax professional about the implications of that. You won't owe any taxes but that $1,000 will get deducted from your lifetime exemption (as I understand the system).

[MonkeyMama]

Try to get the money back out - it may be easier to do before 12/31, so I would call the 529 Administrator ASAP.

Otherwise, you have a couple of different routes with the gift tax filing. There would be no taxes due - but is a pain and I Would avoid if possible.

[hsingh2005]

Try to get the money back out - it may be easier to do before 12/31, so I would call the 529 Administrator ASAP.

Otherwise, you have a couple of different routes with the gift tax filing. There would be no taxes due - but is a pain and I Would avoid if possible.

Unfortunately, that's not an option with the plan administrator. Can you please elaborate on the couple of different routes with gift filing that you eluded to in your post? Your help is much appreciated.

[thesimplemoneyblog]

You would essentially just have to file a gift tax return for the total gift of $27,000, but you would be able to reduce it by the $26,000 annual exclusion for you and your wife. There is a special election where if you actually contribute $65,000 in one year ($130,000 for married individuals) to a 529 plan and treat it as if the gift was made over 5 years then it would not be a taxable gift. It is my understanding that you report the whole amount on the gift tax return and then have to make the 5 year election to treat it as if it was spread out over 5 years. Note that you wouldn't then be able to make more contributions during those five years without potentially triggering potential gift tax consequences. Even then, you probably wouldn't have to actually pay gift taxes since the amount of tax free gifts in your lifetime is over $5 million for 2012 (but this figure is likely to change pretty substantially for 2013 and beyond).

Long story short is it wouldn't hurt to speak with a CPA with more specifics about your situation, but it seems like you shouldn't have any issues. I think (though am not certain) that you would simply treat this extra $1,000 this year as part of the '5 year election' and would essentially just reduce what you could gift to the plan for 2013. I found an Ameriprise link with some good additional information.

529 Plan Contributions | Ameriprise Financial

[MonkeyMama]

Agreed with the simple money blog.

#1 - You can do a 5-year election. Google it - you have to file a gift tax return to make the election - no taxes due. If you are interested in accelerating more deposits into the plan, this may be the way to go. I am not sure on all of the logistics in this scenario.

#2 - Just file the gift tax return and use $1,000 of your lifetime exclusion. No taxes due. This is really the simplest way to go about it. Technically you keep gift tax returns forever and affects your estate at the end. BUT, what are the odds that you will still have these records or remember at the end of your life? It's $1,000 and you have covered yourself in the interim. & is of little consequence when it is likely forgotten about. Though I would recommend keeping the gift tax return with your estate documents (wills, trusts, etc.).

Did the administrator give you no other options? ???

[thesimplemoneyblog]

Do also note that if you wanted to, you could take the $1,000 out of the account now. The 10% penalty applies to earnings in the account and not principal/contributions. Earnings come out pro-rata, so if you put in $27,000 and it is worth $28,000, then if you were to just take $1,000 out of the account, you would only have to recognize about $40 as income and $4 as a 'penalty,' so it might be worth the hassle of doing that than to have to file any types of gift tax returns. Since you mentioned you opened it this year, this might be a viable option without incurring much in the way of taxes or penalty.

[jpg7n16]

Do also note that if you wanted to, you could take the $1,000 out of the account now. The 10% penalty applies to earnings in the account and not principal/contributions. Earnings come out pro-rata, so if you put in $27,000 and it is worth $28,000, then if you were to just take $1,000 out of the account, you would only have to recognize about $40 as income and $4 as a 'penalty,' so it might be worth the hassle of doing that than to have to file any types of gift tax returns. Since you mentioned you opened it this year, this might be a viable option without incurring much in the way of taxes or penalty.

The withdrawal would be subject to income tax.

The contribution would still be subject to gift/estate tax.

Withdrawing the money and paying the penalty is part of a separate tax system and does not negate the gift tax due on the original gift.

The 5 year rule certainly eliminates gift tax requirement, and the lifetime exemption is another method to handle it, though potentially increases estate tax due upon their death. Admittedly, not by much though. Their estate would have to be a couple million before this $1,000 gift affected them. The tax on $1k of a $10mil estate is immaterial.

I'm 100% on board with MM's suggestions above. I'd probably go with option #1 from her post. Just to be certain it doesn't affect their tax situation in any way down the line.

[thesimplemoneyblog]

The withdrawal would be subject to income tax.

The contribution would still be subject to gift/estate tax.

Withdrawing the money and paying the penalty is part of a separate tax system and does not negate the gift tax due on the original gift.

Yes, the income taxation question and gift taxation question are under different tax systems.

Unless the contribution was deducted for state income taxes (can't be deducted for federal income taxes), then the withdrawal of principal would not be subject to federal income tax (but could be subject to state income taxes). Then, only the earnings on the principal would be subject to federal income taxes and the penalty.

Since the contribution and withdrawal are all within the one tax year (and they would occur close to one another), then the gift filing for the year could arguably be reduced by the distribution for the unintentional 'over contribution.' There are ways to correct for 'over contributions' to an IRA, so there may be a way to do something similar with the 529 plan, but this is beyond my area of expertise, so a direct conversation with a CPA would be better to ask how technically/logistically this may have to work. As the rest have said though, the only true concern from a gift tax standpoint is if you have several million dollars and are working with a taxable estate.

Still surprised (as other posters have mentioned) that the administrator of the 529 plan doesn't have an option to handle this.