Who Can Contribute to a 529 Plan? Anyone Can! Here’s How

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Kathryn Flynn

By Kathryn Flynn

December 8, 2023

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. However, there are some key factors to be aware of before contributing to a 529 plan that someone else owns.

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

Contributing to a child’s 529 plan works the same for relatives and non-relatives. You can either contribute 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 designated 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 the 529 plan beneficiary and change the beneficiary later.

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

A 529 plan is considered a tax-advantaged account. The money you invest in a child’s 529 plan grows tax-deferred, and distributions are 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 education savings is one dollar less than they will have to borrow in student loans.

While there’s no federal income tax deduction on 529 contributions, residents of more than 30 states can claim a state income tax deduction. But in seven 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 for married couples) of 529 plan annual 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 contributor is the 529 plan account owner or the owner’s spouse.

Most states require contributions to be made to in-state 529 plans to be eligible for a tax deduction. However, nine tax parity states offer a state income tax benefit for contributions to any 529 plan, not only in-state plans.

Risks of donating to a 529 account

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 education costs. 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 withdrawal 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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