IL 529 as gift for grandchild — whose name should be used?
I want to open an IL 529 account for my new grandbaby before the end of the year. I am unsure how to structure this. My husband and I are retired and on social security and don’t pay IL state taxes any longer. My accountant said the parents should be the beneficiaries, so that they can get the tax break. She said that my daughter and I should be the owners. My bank told me the child should be the beneficiary, which makes sense to me. We are not wealthy people but have some 401K monies we have not started to take RMD’s from yet. Also, if I use the pretax money and put it into the 529 do I avoid the taxes, as it would be a gift? I have tried to read up on the bright start 529 plan and understand it’s a good thing, but just confused on how to do it.
Thanks so very much for taking your time to answer, I always love you on WGN!
Terry Says
OK, well this does get a bit complicated. I want to say one thing before giving any advice. YOu need to make sure that you and your husband have enough money to make it through YOUR retirement before making any substantial gifts to a 529 plan.
Then, all things considered, I’d suggest that your daughter be the owner of the plan and the baby the beneficiary. She should open the plan when the child is born and has a SS number. Then you can contribute a small amount to HER 529 plan — as a “baby gift” and for future birthdays and special occasions.
As long as you keep the amounts small — whatever you can afford — this gesture will be a good one. If you owned the plan yourselves for the child, you would have the option of taking back the money (and paying a 10% penalty and taxes) if you ever really needed it. You can’t do that when you put the money into the plan your daughter sets up for the child.
But since you are retired, and the amounts are small, it will be less complicated to do it the way I suggest. And when your second (!) grandchild is born, they can open another account — even though the money in the 529 plan can be used by any child in the family!
There is now way for the giver to avoid taxes. This will be an after-tax contribution — no matter where the money comes from.
