COLLEGE SAVINGS 101

Savingforcollege.com

10 reasons to give the gift of college education
http://www.savingforcollege.com/articles/10-reasons-to-give-the-gift-of-college-education-631

Posted 2014-06-05

by Kathryn Flynn

Itís graduation party season- looking for the perfect gift? Whether you are shopping for a kindergartener, eighth grader or even a high school graduate, here are 10 reasons why a contribution to a college savings fund will always be appreciated. No gift receipts necessary!

1. Growth potential

Unlike other investment vehicles, earnings in a 529 account are not taxed. That means if you contribute a one-time lump sum of $500 to your newborn nieceís 529 plan, in 18 years when she is ready for college she will have $1,427.19. The interest earned, totaling $927.19, will avoid federal tax. If you made the same investment in a mutual fund this amount would be subject to capital gains tax and her gift would end up being smaller.

2. You may be eligible for a state tax deduction

If youíre opening a new 529 account you can choose almost any plan regardless of where you live. However, many states offer tax benefits for residents, including state tax deductions or credits for contributions. Just be sure to explore all of your options because higher fees and limited investment selection can sometimes outweigh the tax benefits.

Explore you state's 529 plan options

3. Your money will likely be used for its intended purpose

529 accounts are one of the most effective ways to save for college. If you open a custodial account under UGMA/UTMA for a child, they will gain control of the funds once they reach legal age and can do as they please with the money. However, in a 529 account the owner, not the beneficiary, retains control of the funds throughout the life of the account. Whatís more, if funds in a 529 account are not used toward qualified educational expenses, they will lose their tax benefits and also be subject to a 10% penalty tax.

4. Easy to set up and maintain

Once youíve selected the plan that best meets your needs, you simply fill out an application and start making contributions. Most plans allow you to make regular automatic deposits directly from your checking account, which means you wonít have to worry about sending that that birthday check!

Itís also very simple to make contributions to a childís existing 529 account. Many plans accept third-party contributions which can usually be done by filling out a form on their website.

Enroll directly in a 529 plan here.

5. Minimal effect on financial aid eligibility

You donít have to worry too much about hurting a childís potential for financial aid when you contribute to their 529 account. 529 assets, whether the account belongs to the student or their parent, are counted as parental assets on the Free Application for Federal Student Aid (FAFSA). Parental assets are assessed at a maximum rate of 5.64%, while a studentís assets (excluding 529 funds) are normally assed at 20%.

6. Your gift can be passed down to future generations

529 plans are quite flexible and allow you to change the beneficiary at any time. That means if the original beneficiary has some money leftover in the account, the beneficiary can be changed to a younger relative. There are no restrictions on amount of times this can be done, allowing your money to educate an unlimited amount of future generations.

7. The funds can be spent on more than just tuition

A 529 contribution can still be a valuable gift even if the student receives a scholarship or other means to pay their tuition. 529 funds can be spent toward any qualified educational expense, which includes things like room and board, and supplies and equipment required for school.

There is also a scholarship exception to the 10% penalty tax. If the student doesnít need the money for any qualified educational expenses, you can withdraw up to the amount of the scholarship and avoid the penalty. The earnings, however, will no longer be tax-free.

More about scholarships

8. A gift is a gift

Contributions to a childís 529 account are considered a gift for tax purposes and qualify for the $14,000 annual exclusion. If you want to make a larger contribution, you can elect to treat your gift as made over a 5-year period and utilize as much as $70,000 in annual exclusions.

9. You can reduce the taxable assets of your estate

Because 529 contributions are treated as gifts for estate tax purposes, they will reduce your potential estate tax liabilities. This can be an ideal situation for grandparents who are looking to pare down their estate but want to retain control of the funds. Although the money has left the estate, the grandparent, not the beneficiary, has control of the funds in a 529 and can assure they are used toward college.

10. There are still benefits to making contributions even if the child has graduated high school

If your son is graduating high school and will be attending college, a contribution to a 529 plan can still be a great gift. While there wonít be much time for growth, your plan may offer state tax deductions on contributions. If you immediately start making contributions you can withdraw as needed and still claim your tax deduction. Itís also a good way to avoid spending the money you allocated for tuition on something else.

Compare state tax benefits of 529 plans

Photo credit: Derek Hatfield/Shutterstock

Itís graduation party season- looking for the perfect gift? Whether you are shopping for a kindergartener, eighth grader or even a high school graduate, here are 10 reasons why a contribution to a college savings fund will always be appreciated. No gift receipts necessary!

1. Growth potential

Unlike other investment vehicles, earnings in a 529 account are not taxed. That means if you contribute a one-time lump sum of $500 to your newborn nieceís 529 plan, in 18 years when she is ready for college she will have $1,427.19. The interest earned, totaling $927.19, will avoid federal tax. If you made the same investment in a mutual fund this amount would be subject to capital gains tax and her gift would end up being smaller.

2. You may be eligible for a state tax deduction

If youíre opening a new 529 account you can choose almost any plan regardless of where you live. However, many states offer tax benefits for residents, including state tax deductions or credits for contributions. Just be sure to explore all of your options because higher fees and limited investment selection can sometimes outweigh the tax benefits.

Explore you state's 529 plan options

3. Your money will likely be used for its intended purpose

529 accounts are one of the most effective ways to save for college. If you open a custodial account under UGMA/UTMA for a child, they will gain control of the funds once they reach legal age and can do as they please with the money. However, in a 529 account the owner, not the beneficiary, retains control of the funds throughout the life of the account. Whatís more, if funds in a 529 account are not used toward qualified educational expenses, they will lose their tax benefits and also be subject to a 10% penalty tax.

4. Easy to set up and maintain

Once youíve selected the plan that best meets your needs, you simply fill out an application and start making contributions. Most plans allow you to make regular automatic deposits directly from your checking account, which means you wonít have to worry about sending that that birthday check!

Itís also very simple to make contributions to a childís existing 529 account. Many plans accept third-party contributions which can usually be done by filling out a form on their website.

Enroll directly in a 529 plan here.

5. Minimal effect on financial aid eligibility

You donít have to worry too much about hurting a childís potential for financial aid when you contribute to their 529 account. 529 assets, whether the account belongs to the student or their parent, are counted as parental assets on the Free Application for Federal Student Aid (FAFSA). Parental assets are assessed at a maximum rate of 5.64%, while a studentís assets (excluding 529 funds) are normally assed at 20%.

6. Your gift can be passed down to future generations

529 plans are quite flexible and allow you to change the beneficiary at any time. That means if the original beneficiary has some money leftover in the account, the beneficiary can be changed to a younger relative. There are no restrictions on amount of times this can be done, allowing your money to educate an unlimited amount of future generations.

7. The funds can be spent on more than just tuition

A 529 contribution can still be a valuable gift even if the student receives a scholarship or other means to pay their tuition. 529 funds can be spent toward any qualified educational expense, which includes things like room and board, and supplies and equipment required for school.

There is also a scholarship exception to the 10% penalty tax. If the student doesnít need the money for any qualified educational expenses, you can withdraw up to the amount of the scholarship and avoid the penalty. The earnings, however, will no longer be tax-free.

More about scholarships

8. A gift is a gift

Contributions to a childís 529 account are considered a gift for tax purposes and qualify for the $14,000 annual exclusion. If you want to make a larger contribution, you can elect to treat your gift as made over a 5-year period and utilize as much as $70,000 in annual exclusions.

9. You can reduce the taxable assets of your estate

Because 529 contributions are treated as gifts for estate tax purposes, they will reduce your potential estate tax liabilities. This can be an ideal situation for grandparents who are looking to pare down their estate but want to retain control of the funds. Although the money has left the estate, the grandparent, not the beneficiary, has control of the funds in a 529 and can assure they are used toward college.

10. There are still benefits to making contributions even if the child has graduated high school

If your son is graduating high school and will be attending college, a contribution to a 529 plan can still be a great gift. While there wonít be much time for growth, your plan may offer state tax deductions on contributions. If you immediately start making contributions you can withdraw as needed and still claim your tax deduction. Itís also a good way to avoid spending the money you allocated for tuition on something else.

Compare state tax benefits of 529 plans

Photo credit: Derek Hatfield/Shutterstock

 

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