Completed Sample IRS Form 709 Gift Tax Return for 529 College Savings Plan

529Let’s say you are fortunate enough to be able to make a large contribution to a 529 college savings plan, perhaps for your children or grandchildren. You read from multiple sources that you are able to contribute up to $70,000 at once for a single person or up to $140,000 as a married couple, all without triggering any gift taxes or affecting your lifetime gift tax exemptions (for 2014 and 2015). What you are doing is “super funding” or front-loading with 5 years of contributions, with no further contributions the next four years.

Those are pretty big numbers, but you also discover that any contribution above $14,000 will require you to file a gift tax return because that is the annual gift tax exclusion limit for 2014 and 2015. You’ll need to fill out IRS Form 709 [pdf], “United States Gift (and Generation-Skipping Transfer) Tax Return”. The instructions are quite long and confusing. You ask your accountant and they suggest talking to your estate lawyer. You may wish to avoid paying the $400 an hour or whatever it will cost as you know the form should be pretty straightforward.

So how do you fill out form 709 for a large but simple 529 contribution? You search for sample completed forms online but very few clear resources turn up. Here are the resources that I found most helpful:

Here’s a redacted version of my completed Form 709. Let me be clear that I am not a tax professional or tax expert. I am some random dude on the internet that did his own research to the best of his abilities and filled out the form accordingly. This is what my form looks like. It could be wrong. You’ll need to make changes to conform to your specific situation. Feel free to offer a correction, but please support your statement.

For my version, I am assuming that you and your spouse contributed the maximum $140,000 together in 2014. (No, I didn’t actually put in that much.) Note that you’ll need to file two separate gift tax returns, one for you and one for your spouse. Mail them to the IRS in the same envelope, and I like to send them certified mail.

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Here is my Form 709, Schedule A, Line B Attachment

Form 709, Schedule A, Line B Attachment

– Donor made a gift to a Qualified State Tuition Program (a 529 plan).

– Total amount contributed $140,000 in 2014.

– Donor elects pursuant to Section 529(c)(2)(b) of the IRS Code of 1982, as amended to treat the gift as having been made equally over a 5-year period.

– The gift was made jointly by the taxpayer and the taxpayer’s spouse on January 1st, 2014 and will be split equally in half.

– Election made for $140,000 over 5 years is equal to $28,000 total per year, or $14,000 per person per year.

– The contribution is for

Juniper Doe
Daughter
1234 Main St
New York, NY 10001

When to file Form 709. When taking the 5-year election, you must fill out the gift tax return (Form 709) by April 15th of the year following the year in which in the contribution was made. So if you make the contribution in 2015, you must file Form 709 by April 15th, 2016. If you make the upfront contribution in the first year and then make no future contribution in the next four years, you do not have to file a gift tax return after the one you did for the first year.

What if you’re late? Well, you should file the Form 709 as soon as possible. If you did not exceed the limits then technically there is no gift tax due, and there is no penalty that I could find for late filing when there is no taxes due. Still, I would file ASAP.

The tax information set forth in this article is general in nature and does not constitute tax advice. The information cannot be used for the purposes of avoiding penalties and taxes. Consult with your tax advisor regarding how aspects of a 529 plan relate to your own specific circumstances.

Annual Income by College Major Ranked by Quartile and Percentile

Here’s another article about the relationship between college majors and future earnings. But this WSJ article at least looks beyond just providing the median wage and helps you visualize the spread between the 25th and 75th percentiles for each major:

wsjcollegerank

There is also an interactive chart embedded in the WSJ article. For example, I could sort to find the top 10 majors according to their 25th percentile wage, imagining more of a worst-case scenario that just assuming I’ll get the median income or higher. Here are a few more nuggets that may surprise you:

Graduates of architecture programs may have higher salaries than teachers, as the latest paper shows, but the February report noted that they’re also likely to see unemployment rates twice those of education majors.

[…] just choosing a major in science, technology, engineering or mathematics, known as the STEM fields, doesn’t secure a hefty paycheck. Mr. Carnevale’s team found that biology majors have median annual wages of $56,000 over their careers from age 25 to 59, or about one-third less than physicists.

Yet once biologists finish graduate programs—and more than half of them do—their median annual earnings jump to $96,000, roughly on par with physicists who have advanced degrees.

There are also wide ranges in salaries for specific majors. The top 25% of earners who majored in finance can expect annual earnings of more than $100,000, while the bottom quartile may bring in just about $50,000 a year.

[…] lifetime earnings for economics majors at the 90th percentile are nearly triple those at the 10th, reflecting the range of destinations for such experts in government and the private sector.

I support the notion that prospective income shouldn’t be the only consideration in choosing a career, as I’ve tried working in decent-paying fields that don’t interest me and it just didn’t work out. However, money remains a factor and I like to have an idea of what the stats are.

Here’s another thing to consider: early retirement in under 20 years requires a 50% savings rate. Such a savings ratio is much more likely if you make twice the overall median salary with median spending (make $120k household income, spend $60k) as opposed to a median salary and half-of-median spending (make $60k household, spend $30k). Someone could start working at 21, retire by 40, and spend the rest of their life doing whatever job or activity they wanted to. Semi-retirement is another option.

ROI of Brand Name Colleges? It’s What You Study In College That Matters, Not Where You Go

Soon high school seniors will start receiving their college acceptance letters. This week’s issue of The Economist has an article discussing the results of a PayScale study of the relationship between the financial return on investment (ROI) of a college degree with the selectivity of the college itself. Via NextDraft.

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The two trendlines above support the conclusion that what you study matters far more than where you study it. The flatness of the lines show that selectively doesn’t improve ROI much for degrees of the same major, while the gap between them shows that the type of major has a significant effect on average future salary.

Engineers and computer scientists do best, earning an impressive 20-year annualised return of 12% on their college fees (the S&P 500 yielded just 7.8%). Engineering graduates from run-of-the-mill colleges do only slightly worse than those from highly selective ones. Business and economics degrees also pay well, delivering a solid 8.7% average return. Courses in the arts or the humanities offer vast spiritual rewards, of course, but less impressive material ones. Some yield negative returns. An arts degree from the Maryland Institute College of Art had a hefty 20-year net negative return of $92,000, for example.

You can also play around with the PayScale ROI rankings here.

Take from this data what you will, but perhaps it will soothe the pain of rejections and help relieve the societal pressure to get a “brand name” degree.

Best 529 with FDIC-Insured High Yield Savings: Interest Rates Up to 2.25% APY

529Many people want to take advantage of the tax benefits of 529 college savings accounts, but don’t want to deal with the volatility of stocks or bonds. Perhaps the beneficiary will need the funds soon, or you want the security of FDIC insurance. Many students are now adults saving for their own educations in a few years. In this case, consider the Virginia CollegeWealth 529 Savings Account and its following features:

  • FDIC-insured through partner banks
  • $25 minimum to open
  • No annual fee
  • No monthly maintenance fees
  • No state residency requirements
  • Up to a $4,000 state tax deduction for Virginia taxpayers
  • High interest rates of up to 2.25% APY

Deposit details. The FDIC insurance coverage is $250,000 per account owner, per bank. All Virginia College Savings Plan 529 Accounts have a maximum aggregate contribution limit per beneficiary of $350,000.

Will the interest rate stay high? It is important to note that this is a savings account and not a certificate of deposit (CD), so the interest rate is subject to change at any time. If you are willing to commit to a 5-year CD, the Ohio CollegeAdvantage 529 has 5- to 12-year CDs paying 2% APY right now.

However, looking through old documents indicates that the interest rates that you see today for BB&T Bank have been the same at least as far back as June 30, 2011 (source, also checked in 2012 and 2013). That means BB&T’s rates have been the same for nearly four years during a period of historically low interest rates. I think that should provide some measure of confidence that the rates won’t drop dramatically the day after you open the account.

For Union Bank, rates have been slightly higher in the past (2.5% APY in 2011, 2.3% APY in 2012). Not a huge drop over time but interesting that Union Bank used to be higher but now BB&T is higher. I’m assuming you can also switch internally between these two banks. You can also roll over your assets into another 529 plan in the future, if you wish.

Partner banks and current rates (as of March 4th, 2015)

Union Bank & Trust

  • Balances of $1 to $9,999: 1.75% APY
  • Balances of $10,000 or more: 2% APY

BB&T

  • Balances of $1 to $9,999: 2% APY
  • Balances of $10,000 to $24,999: 2% APY
  • Balances of $25,000 or more: 2.25% APY

Best high-yield savings account, period? In a weird twist, you can put money in a 529 and take an unqualified withdrawal where you’ll be subject to income taxes and an additional 10% penalty on any earnings . But you’d have to pay income tax on interest from a normal savings account anyway. That means you could treat this account like a regular taxable savings account and get an effective rate of 1.8%+ APY even after any penalties. That is nearly a full percentage point higher than my current Ally Bank high-yield savings. I don’t know how many people have actually taken advantage of this “loophole” option, but it is interesting. One possible drawback is that it can take longer (possible weeks) to withdraw money from a 529 than from a traditional bank account.

Comparing Your 529 In-State Tax Deduction vs. Better Out-of-State Plans

50statesI’m getting ready to put down a decent chunk of money into a 529 college savings plan, which means lots of research as there are a lot of options and nuances. A general plan for those without strong investment preferences would be to go with one of the age-based portfolios from a consistently top-rated plan by Morningstar, or your in-state plan if the tax deduction is juicy enough.

But how exactly do you compare them? The easiest way to calculate your in-state tax benefits is to use a tool from either Vanguard or SavingforCollege.com.

Let’s say you are a married Virginia resident making $100,000 in household taxable income and you want to contribution $4,000 a year to college. Here’s what the Vanguard tool says:

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The big block of text explains the assumptions the tool had to make in order to keep things simple. Note that in addition to the state tax savings, you have to consider that you’ll have less state tax to deduct on your federal return (if you itemize deductions).

The SavingForCollege tool comes to the same conclusion regarding tax savings (minus a rounding difference). However, it also goes one step further and helps you quantify the relative value of your in-state tax deduction.

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In order for the out-of-state 529 plan to make up the difference from the lost state tax benefit, it would have to achieve better net investment returns of 0.25% per year over the 18 year time period.

So if your in-state plan offers similar desired investments but with expense ratios that were 0.25% higher than the best out-of-state plan, you may actually want to forgo the tax deduction. Note that this number is also based on a set of default assumptions like an 18-year investment period and a 6% annual returns for both plans (you can edit these as you like).

But wait! Some state plans allow you to roll your assets over to another state after making the contribution, and keep the tax deduction. So you could make the contribution, grab the tax credit, and then roll it over into another state’s plan. (You are allowed to have multiple 529 plans.) However, many states have a recapture or “clawback” provision that will make you pay back the tax benefit somehow. For example, if you perform a rollover or non-qualified withdrawal from the Virginia 529 plan, the principal portion will be added back to your Virginia taxable income (to the extent of any prior deductions).

529 Plan Tax Benefits Are Subject To Future Change

529During the most recent State of the Union address, the President’s proposal includes removing one of the current key tax advantages for 529 college savings plans. It is important to remember that this is only a proposal and is unlikely to pass a Congress with a Republican-majority. But it does serve as a reminder that the features of all tax-advantaged accounts are subject to future change.

Section 529 plans currently offer excellent tax advantages for college savings. You put in after-tax money, and that money is allows to grow on a tax-deferred basis, and as long as future withdrawals are used for qualified education expenses, there are no taxes on the back-end either.

The proposed changes are to now tax withdrawals (capital gains only) as ordinary income, leaving only the ongoing tax-deferral aspect. In exchange, the annual limits of educational tax credits would be increased along with other changes.

A quick history lesson on 529 plans. Per Wikipedia, Section 529 plans have only been around since 1996, and started out with withdrawals taxed as ordinary income. Tax-free withdrawals for qualified educational expenses were only added in 2001 on a temporary basis (scheduled to expire in 2010) but then in 2006 they were made “permanent” (not scheduled to expire). That is why this is referred to as a “roll back”.

The concern now is that the tax advantages only benefit a small group of people (read: rich folks). From CNN Money:

An analysis by the Government Accountability Office found that in 2010 less than 3% of families saved in a 529 plan. The GAO estimated that families who saved in 529s had a “median financial asset value” that was 25 times that of families without a 529.

But the College Savings Foundation, citing an investment industry analysis, noted that in 2014, over 70% of 529 plans were owned by households with income below $150,000.

The lesson here is that not all tax benefits are considered “sacred”, especially if they can be spun as rich vs. poor. For example, in my opinion the ability to inherit IRAs (“Stretch IRAs”) in order to give your children decades more of tax-free growth probably won’t last forever. But the idea of taxing Roth IRA withdrawals would be very hard sell as it would broadly affect people across various income levels.

I don’t think I would have minded if this was for a newly-designed plan, but I dislike the idea of penalizing the many families (like myself) who have placed their money in a 529 due primarily to the promised tax benefit (which can’t be withdrawn early without penalties). (Edit: The proposal language actually only refers to “new” contributions, so existing contributions should be grandfathered. Might make for some confusing accounting.) Still, as the parent of two kids under 3, I have to decide whether to keep putting money into these things without knowing what the rules will be in the future.

More: WhiteHouse.gov, WSJ

529 College Savings Plans Now Allow Two Investment Changes Per Year

529Here’s a quick note about a change in 529 college savings plans. Up until recently, you were only allowed one investment change per year, per beneficiary. Starting in 2015, a change in federal law means that you are now allowed two investment changes per calendar year, per beneficiary.

Specifically, this is due to a provision of the new ABLE (Achieving a Better Life Experience) Act. For those that like history lessons, this Fairmark article has more background on why 529s restrict investment changes at all.

Now, the rules have always permitted a change in investment options any time you change the account’s beneficiary, so people have also used this as a workaround although it may not be wise to abuse it. Changing your asset allocation all the time usually isn’t a good idea either, but now you have a little more flexibility (i.e. you can undo a change you regret making!).

Morningstar Top 529 College Savings Plan Rankings 2014

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Investment research firm Morningstar has released their annual 529 College Savings Plans Research Paper and Industry Survey. While the full survey appears restricted to paid premium members, they did release their top-rated plans for 2014. Remember to first consider your state-specific tax benefits that may outweigh other factors. If you don’t have anything compelling available, you can open a 529 plan from any state.

Morningstar uses a Gold, Silver, or Bronze rating scale for the top plans and Neutral or Negative for the rest. The criteria include five P’s:

  • People. Who’s behind the plans? Who are the investment consultants picking the underlying investments? Who are the mutual fund managers?
  • Process. Are the asset-allocation glide paths and funds chosen for the age-based options based on solid research? Whether active or passive, how is it implemented?
  • Parent. How is the quality of the program manager (often an asset-management company or board of trustees which has a main role in the investment choices and pricing)? Also refers to state officials and their policies.
  • Performance. Has the plan delivered strong risk-adjusted performance, both during the recent volatility and in the long-term? Is it judged likely to continue?
  • Price. Includes factors like asset-weighted expense ratios and in-state tax benefits.

Here are the Gold-rated plans for 2014 (no particular order):

  • T. Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • Utah Educational Savings Plan

Here are the consistently top-rated plans from 2010-2014. This means they were rated either Gold or Silver (or equivalent) for every year the rankings were done from 2010 through 2014.

  • T. Rowe Price College Savings Plan, Alaska
  • Maryland College Investment Plan
  • Vanguard 529 College Savings Plan, Nevada
  • CollegeAdvantage 529 Savings Plan, Ohio
  • CollegeAmerica Plan, Virginia (Advisor-sold)

I collected the previous individual year rankings from 2010-2013 last year. Utah only missed on out the consistent list because they weren’t top-ranked in 2010.

Again, either you go for the in-state tax savings, or pick a top plan from any state. Ignoring state tax differences, my standard recommendation is to pick either Nevada or Utah, although many other state plans may have specific investments that will work just fine. The Vanguard-branded 529 Plan has low costs, decent investment variety, and a long-term commitment to passing on future cost-savings. The Utah 529 plan has very low costs and is highly customizable for DIY investors.

529 College Savings Plans: State-by-State Tax Benefit Comparison

When choosing a 529 college savings plan, you’ll often have to weigh any in-state benefits with the superior investment options from an out-of-state plan. Every state seems to have their own unique combination of tax deductions and/or matching grants. Morningstar ran an analysis comparing the home-state tax benefits for a hypothetical family saving for college.

We selected a hypothetical family of four that earns $50,000, or close to the national median household income. In our scenario, the family has two children and contributes $100 per month to each child’s 529 account, for a total contribution level of $2,400 per year. We looked at the state tax benefits as of October 2014 and calculated the dollar value for each plan.

Here is a chart of their results (click for original image):

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Keep in mind that tax benefits can change, as can the quality and cost of each state’s 529 plan. An expensive plan can switch administrators and transform into a cheap plan the next year. A cheap plan usually stays that way, although it might get a little more expensive. Some states let you grab the tax deduction and then immediately roll over the assets to any outside plan; other states “recapture” the tax deduction if do you that.

Charts: Average New Car Price vs. Average Student Loan Debt 1990-2014

When I was a senior in high school, I still remember my parents offering me a new luxury car instead of tuition assistance. Although I’m pretty sure it was only a test, it did serve to remind me of the cost of tuition and not to waste it. Seeing the average student debt of graduates is now over $30k, I wanted to see how the price of a new car and student debt tracked. These are the best charts that I could fine.

The green line in the first chart tracks the average cost of a new vehicle as rising from ~$15,000 to ~$27,000, within the time period of 1990 to present. I don’t believe the green line is inflation-adjusted. You can see it runs from roughly $15,000 to roughly $27,000. (Source: Atlantic)

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The second chart below tracks the average student debt upon graduation over basically the same timeframe, 1990 to present. The non-inflation-adjusted value has risen gone from ~$9,000 to ~$33,000. (Source: WSJ)

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It is hard to equate the two values because student debt is just the amount left over after the parent (usually) pays as much as they can while the student is in school. However, this USA Today article suggests that since 2010 parents on average have been paying less.

Five years ago, only half of families reported using grants and scholarships to pay for college. This year, two-thirds of families did, the study shows. […] Meanwhile, parents are contributing less of their income and savings toward college costs, covering 27% of college costs compared with 37% in 2010, the study shows.

At the same time, other reports show that for parents with top 20% incomes, education spending has nearly doubled as a share of their total budget.

Average student debt is definitely growing faster than new car price. But in terms of total size, it is still comparable to the cost of a new car. People finance new cars all the time. Does that make student loans less scary? I don’t know, because financing a new car has always scared me a lot too.

Even after taking the tuition assistance from my parents, I still came out of college with roughly $30,000 in student debt myself, above-average at the time. I like to think that I got better value of my degree than a new car. :)

College Tuition Hasn’t Risen As Much As You Think

gradcapThe new fall semester is underway, which means more college articles! Morgan Housel of Fool.com recently talked about how the increasing cost of college is exaggerated (emphasis mine):

According to the College Board, the annual sticker price of attending a private four-year college increased from $17,040 in 1992 to $29,060 in 2012, adjusted for overall inflation. But grants and scholarships more than doubled during that period. On net, the median annual cost of attending private college went from $10,010 in 1992 to $13,380 in 2012, meaning the amount students actually paid grew half as fast as the sticker price suggests.

Ditto for public four-year schools. The sticker price of tuition was $3,810 in 1992, and $8,660 by 2012, adjusted for overall inflation. That’s a gain of 4.2% per year. But the actual amount students paid went from $1,920 to $2,910, or an annualized gain of 2%. Adjusted for grants, the inflation-adjusted cost of two-year college has actually declined over the last 20 years.

Why would schools balloon the sticker price but make it up with scholarships? A lot of it is marketing. If I say, “Billy, tuition is $20,000 a year,” it sounds high. If I say, “Billy, tuition is $40,000 a year, but we’ll give you a scholarship to bring it down to $20,000,” it’s an offer he can’t refuse. There’s also a rich student, Jimmy, whose parents will pay $40,000 without batting an eye. Jimmy is actually making Billy’s scholarship possible.

By those numbers, the cost of 4-year public college grew at 2% annually above inflation over that 20 year period, while the cost of 4-year private college grew at 1.5% annually above inflation.

The average student debt is roughly $30,000, about the price of the average new car. As Jim of the FreeBy50 blog points out, only a tiny 0.3% of graduates end up with over $100,000 of student loan debt. Any media piece about a struggling student with a six-figure student loan is an outlier.

Now, I’m not saying there aren’t problems. For one, the wages of new graduates are stagnant. But the sky is not falling.

Increasingly, parents should look at listed tuition prices like the sticker price of a car. It’s just a starting point for negotiations. Colleges, especially private colleges, can easily adjust what they actually charge per student based on two variables:

  • Their financial situation, using need-based aid.
  • Their desirability as an applicant, using merit-based aid.

Universities have all sorts of financial aid tricks to adjust actual out-of-pocket costs… various grants and scholarship funds that they can draw from, work-study guarantees, comped room & board, and so on. You can even negotiate your aid package with them further after getting your acceptance letter.

In fact, the industry term is tuition discount rate, which measures the upfront tuition discount given directly from private universities, thus excluding outside scholarships, tax breaks, or subsidies. The NACUBO tuition discount rate for 2013 was 45% and had risen every year for the previous 7 years.

If Billy is a somewhat borderline applicant and his parents have a high income, he’ll may get accepted but must pay full sticker price. If Billy is a very strong applicant, he may get accepted with a partial or full scholarship regardless of income.

This is why parent shouldn’t automatically just tell their kid to go to a state public school. If your child finds the right fit, they could go to private school for close to or less than the cost of public. Many households with modest income and financial assets will be offered substantial grants. Of course, you have to be ready to say “no” if your kid gets in without any aid, meaning the total cost is more than a house (my personal fear!).

Effect of Student Loan Debt on Homeownership Rate

Multiple sources are suggesting that increasing student loan debt levels will have a significant impact on future housing prices because people will delay their home purchases (or put them off entirely). Although that seems like a reasonable assumption, I haven’t actually seen any hard data on it.

In a recent Vanguard research paper titled No bubble to burst: U.S. student debt is not housing [pdf], they took data from the Federal Reserve’s 2010 Survey of Consumer Finances and U.S. Census Bureau and found that:

Although financing a bachelor’s degree with student debt decreases the likelihood of a typical 30-year-old college graduate purchasing a home by –1.7%, obtaining that degree also increases the likelihood of purchasing a home by 10.8%, relative to not attending college at all.

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In the end, the conclusion seems to still be consistent with other findings. Getting that college degree is still “worth it” financially, even with the accompanying debt, at least on average. Your income is higher, you’re less likely to be unemployed, and you are more likely to own a home.

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I suppose the primary thing to avoid is to not be above average on the debt. If you have to take on $120,000+ of debt just to get a 4-year degree, you’re probably going to the wrong school anyway. If the school really wanted you, they’d offer you a better aid package with grants and/or tuition waivers.