College savings: The gift parents want, but won't ask for

http://www.savingforcollege.com/articles/college-savings-the-gift-parents-want-but-wont-ask-for

For parents looking for ways to boost college savings, asking for 529 gifts should be a no-brainer. When a friend or relative contributes to your child's 529 plan, that money will grow tax-free, and will not be taxed when it's withdrawn to pay for college. Of course, gifts probably won't cover your entire college costs, but they could help narrow a savings gap and reduce the amount your child will have to borrow. Sounds better than another toy, right?

Yet according to a new survey from Savingforcollege.com, only 36% of parents said they ask for friends and family to contribute to a college savings plan in lieu of gifts. Of the parents who don't ask for gift contributions, 39% said it was because they felt embarrassed or uncomfortable, or just didn't think it was appropriate to ask.

As with most money conversations, discussing your 529 plan with family and friends can feel a bit awkward. But these days, crowdfunding is being used for just about anything, from medical expenses to vacations - so what's wrong with asking for help with child's college savings, too? Here are some tips on how to tactfully bring up the topic of 529 gifts in a way that should make everyone more comfortable with the idea.

1. Open a 529 plan
   Parents who already have a 529 plan are more likely to ask for gift contributions, and are more likely to receive larger gifts. According to the survey, 36% of parents with a 529 plan said they ask friends and family for help with college savings, compared to only 30% of parents who do not have a 529 plan. Of those who have a 529 plan, 20% said they've received gifts of $200 or more, compared to only 10% of those who did not have a plan.

   Opening a 529 plan for your child is easy. There are a number of plans available, each with different investment options to choose from. When you find the best 529 to suit your family's needs, you can enroll online or with the help of a financial advisor. Once you're enrolled, you'll have somewhere to put your gifts.

2. Understand and be able to explain 529 plan benefits
   529 plans are investment accounts specifically designed to help families save for college. Because they offer tax-free compounding, even small gifts can add up. So instead of buying a Hatchimal Surprise for a five-year-old, a relative could deposit $50 into their 529 account. Assuming a 6% annual investment return, the child would have $107 in 13 years when it's time for college.

   College savings plans are also popular among wealthy grandparents because contributions are treated as completed gifts for tax purposes. Contributions of up to $14,000 ($15,000 in 2018) will qualify for the annual gift tax exclusion, and will not count against the grandparent's $5.49 million lifetime exemption ($5.6 million in 2018). If a friend or relative is looking to remove a larger amount from their taxable estate, they can “superfund” a 529 plan with up to $70,000 ($75,000 in 2018), if they elect to treat the contribution as if it were made over five years.

   In addition to federal tax savings, 34 states and the District of Columbia offer additional state tax deductions or credits for 529 plan contributions. In many cases, as long as they are a state resident, anyone who makes a contribution can claim the tax benefit. Depending on the size of the gift, this could be a major incentive for a grandparent or other relative. However, be sure to check the rules in your state. In some cases, like New York and Iowa for example, only contributions made by the account owner or their spouse are deductible.

3. Make it easy for the gift giver
   There are different ways to make a gift contribution, depending on the 529 plan you selected.

   • Check or cash to the account owner – If your plan doesn't accept third-party contributions, you can collect the gift and make the deposit yourself.
   • Electronic gifts – Many plans are trying to make 529 gifting even easier by offering customizable web pages, social media announcements and email templates to send to friends and family.
   • Gift cards – Gift of College gift cards can be linked to your 529 plan, and are available online or at Toys R Us and Babies R Us stores across the country.

   Some gift givers may prefer to open their own 529 plan and name the child as the beneficiary. In fact, the majority of grandparents surveyed by Savingforcollege.com (75%) made contributions to their own 529 plan instead of gifting contributions to a parent's account. When asked why they opened their own 529 plan, grandparent responses included: the parents haven't opened a plan yet, they wanted to give the grandchild the gift directly, they wanted to maintain control of the account, and they wanted to take advantage of state and/or tax benefits.

4. Keep the gift giver up to date with progress
   Some plans, including those managed by T. Rowe Price, offer a gifting portal that can be customized and updated with birthdays and other milestones when a loved one may want to make a contribution. The platform automatically tracks the gifts your child receives, making it easy to send thank you cards and show appreciation.

   Plans who offer these types of tools have seen an increase in 529 plan gifting contributions in recent years. According to the College Savings Foundation, during the first nine months of 2017, Fidelity saw a 40% increase in gifting contributions and California's Scholarshare saw a 67% increase over the same period in 2016.

RELATED: How much can you contribute to a 529 plan in 2017?