How to Gift a 529 Savings Account
If you want to invest in a child’s future rather than giving them another toy they’ll quickly outgrow, consider giving a gift of college savings this holiday season. A 529 college savings plan can help a young relative or close family friend get started on the right financial foot when they enter adulthood.
What is a 529 savings account?
A 529 college savings account is a tax-advantaged savings account designed to be used for education expenses. The primary benefit is that earnings grow tax-deferred and withdrawals are tax-free when used for qualified education expenses.
Withdrawals can be made tax-free and penalty-free for education expenses from elementary school through college, but there are annual limitations for withdrawals made before the college level.
Tuition, fees, room and board, textbooks and other education-related supplies should all qualify under a 529 plan, but it’s important to check with the school to confirm which expenses are eligible. Any distributions that don’t fall under qualified expenses will be taxed as regular income and may be subject to a 10% federal penalty.
How to give a 529 college savings plan this holiday
Anyone can open a 529 college savings account in a child’s name or choose to contribute to an existing one. Here’s how to give money using a 529 plan this holiday season.
Ask the parents
Check with the child’s parents to confirm they are on board with the idea. They may already have a college savings account that you can contribute to instead of opening your own. Or they may be more interested in opening one themselves to avoid negative financial implications for the child later down the road.
For instance, distributions from an account not owned by a parent or student could be considered untaxed income, which could affect child’s need-based financial aid eligibility in the future.
Write a check or contribute directly to their account
If the parents choose to open an account, your only responsibility is to write a check for whatever amount you desire or make a payment directly to the plan. Many plans offer features that allow third-party contributions via a link or by entering the savings account number.
Know your options for opening a 529 plan
If you choose to move forward with opening the account yourself, you’ll need to research your options.
Look for state-specific tax benefits. Some states provide a state income tax deduction or credit for contributing to a 529 plan. Start by researching your own state’s plan to see if you can take advantage of this tax benefit. Keep in mind that you aren’t limited to only choosing a plan in your state of residency, so be sure to explore other states’ options, as well. A limited number of states offer tax parity, meaning you can contribute to any state’s plan and you’ll still receive the deduction.
Match your investment knowledge. If you’re a seasoned investor, choose a 529 plan that offers more flexibility for investing. However, if you’re new to investing or simply want a hands-off choice, go with a plan that offers an age-based portfolio. This will designate investments that are more aggressive when the child is younger and transition to a more conservative approach as the child gets closer to college age.
Choose a plan with low fees. Each plan may come with an annual fee or operating costs. Most 529 plans have fairly low fees, but it’s worth comparing plans to get the best deal.
Open the account
You can open a 529 plan online or mail-in an application. SavingforCollege.com offers a tool that compares each state’s plans. You can also use an organization like the College Savings Plan Network to compare investment portfolio options and costs.
To open an account, you’ll need the child’s social security number and birth date. You may need other personal information, like their address. Select your investments or choose an age-based portfolio. Be aware that you’ll only be able to make changes to your investments two times per year.
You’ll also need to decide whether you want to gift a set amount of money monthly, annually or as a one-time amount. Many 529 plans are designed to make giving easier, which means more friends and family can contribute at any time throughout the child’s life. You should explain this to the child’s parents, so they can inform family and friends for future gift-giving occasions.
Get creative with your present
Most young children won’t understand the significance of your gift, so put some thought into your gift-wrapping presentation. Create a fun, festive certificate or compound interest graph that shows how much your gift is worth now versus 5, 10 or 15 years down the road. This visual can help ignite an interest in saving which can lead to more healthy financial habits.