How to give the gift of college savings

A gift of college savings is a meaningful alternative to traditional birthday, holiday, baby shower and graduation gifts. But, according to a recent survey from the College Savings Foundation, only 20% of parents ask loved ones contribute to their child’s 529 plan instead of giving a material gift. Many 529 plans are making gifting easier by offering gifting platforms that accept online contributions and can be shared with friends and family. 

Benefits of gift giving through a 529 plan

A 529 plan gift will grow tax-free over time, and distributions will not be taxed as long as the funds are used to pay for qualified higher education expenses. If the beneficiary decides to use the funds for something other than college, only the earnings portion of the distribution will incur income tax and a 10% penalty.

Gift givers may also qualify for a state income tax deduction or credit for 529 plan contributions. Most states allow anyone who contributes to a 529 plan to claim the state income tax deduction or credit, while some only offer this benefit to the 529 plan account owner.

How to give a gift through a 529 plan

A gift giver can open a new 529 plan account in a child’s name or contribute to an existing account. Contributions to a custodial 529 plan account or to a parent-owned 529 plan will minimize the impact on eligibility for need-based financial aid. 

Gift contributions can be sent by check to almost any 529 plan. Just make the check payable to the 529 plan and write the beneficiary’s name and account number on the check. But, the 529 plans listed below make it easier to give the gift of college with online contribution and other crowdfunding tools. You can also contribute to a 529 plan with Gift of College gift cards, which are available to purchase online or at over 3,000 retailers including Target and Barnes & Noble. Ask the child’s parent about the best way to contribute.

How to avoid gift taxes on 529 plan gifts

Most people can make fairly large contributions to a child’s 529 plan without incurring gift taxes. Gifts of up to $15,000 per beneficiary will qualify for the annual gift tax exclusion. Friends and family who want to make a larger tax-free gift can use 5-year gift tax averaging. Gifts up to $75,000 can be treated as if they were spread evenly over a 5-year period. The gift tax exclusion limit is per gift giver, so couples can gift up to $30,000 per year per child, or $150,000 if using 5-year gift tax averaging. 

529 plans that offer e-gifting platforms

Source: Savingforcollege.com research