Can You Contribute to a Non-Family Member’s 529 Plan?

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Kathryn Flynn

By Kathryn Flynn

January 21, 2020

All 529 plans accept third-party contributions, regardless of who owns the account. That means anyone, including grandparents, aunts, uncles or even friends can help a child save for college. You do not have to be a family member of the beneficiary to contribute to their 529 plan.

How to contribute to a non-family member’s 529 plan

Contributing to a child’s 529 plan works the same way for relatives and non-relatives. You can either make contributions to a 529 plan account that you own or make gift contributions to a 529 plan account owned by someone else, such as the child’s parent. You can also open a custodial 529 plan account for a child who is not a relative.

A 529 plan can be opened online or through a licensed financial advisor. You will need the 529 plan beneficiary’s date of birth and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) at the time of enrollment. If you don’t have this information, you may name yourself as the 529 plan beneficiary and change the beneficiary at a later date.

You can generally make a 529 plan gift contribution by check or electronic payment, depending on what the 529 plan allows. Many 529 plans have gifting platforms that make it easy for parents to ask for and receive college savings gifts via email or social media. 

529 plan tax benefits

The money you invest in a child’s 529 plan grows on a tax-deferred basis and distributions are completely tax-free when used to pay for the child’s qualified education expenses. Because of this tax-free compounding, even a small gift can grow substantially over time. Every dollar a student has in college savings is one dollar less that they will have to borrow in student loans.

In some states, residents can deduct 529 plan contributions from state taxable income. But in 10 of these states, income tax benefits are only available to 529 plan account owners who contribute to their own 529 plan.

For example, Michigan residents who contribute to a Michigan 529 plan owned by another person may deduct up to $5,000 ($10,000 if married) of 529 plan contributions from state taxable income. New York offers a similar state income tax benefit for 529 plan contributions, but the benefit is only available if the contribution is made by the 529 plan account owner or the account owner’s spouse. 

529 plan contributions and financial aid

A 529 plan affects a student’s eligibility for financial aid, but the amount of the impact varies depending on who owns the account and when distributions are taken. Custodial 529 plan accounts and 529 plan accounts that are owned by the beneficiary’s parent are considered parental assets and have a relatively minimal effect on financial aid eligibility. Distributions from a parent-owned or a custodial 529 plan are not counted as income on the Free Application for Federal Student Aid (FAFSA).

If a 529 plan is owned by an independent student or anyone other than the beneficiary’s parent, assets are not included on the FAFSA. However, when a distribution is taken to pay for the student’s college expenses it is counted as untaxed income and will have a negative impact on financial aid eligibility. 

There are workarounds to reduce the negative impact a non-parent-owned 529 plan has on financial aid eligibility. For example, you can time 529 plan distributions so that they are not counted on the student’s FAFSA. 

Custodial 529 plan accounts

If you contribute to a 529 plan account owned by the beneficiary’s parent or anyone else, there is no guarantee that the money will be used for its intended purpose. For example, nothing stops a parent from changing the 529 beneficiary to another child. A parent could also use their child’s 529 plan savings to pay for groceries, bills, a vacation or a new car. The only consequence of taking a non-qualified distribution is that the earnings portion of a non-qualified distribution is subject to income tax and a 10% penalty.

Opening a custodial 529 plan account for a child can help ensure that the 529 plan funds are used for their intended purpose. As the account custodian, you will manage the 529 plan account on behalf of the child, and you cannot withdraw funds for any purpose other than to pay for the child’s education.

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