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. Unfortunately, the number of parents asking for a contribution to a 529 plan, or other college savings accounts, is still well in the minority compared to those asking for other gifts. Many 529 plans are making gifting easier by offering gifting platforms that accept online contributions and can be shared with friends and family. 

If you’re interested in opening a 529 plan for someone as a gift, or for your child to ask for contributions from others, check out our best 529 plans available today.

Best Ways to Give the Gift of College Savings

There are several different ways that you can give money for college to a loved one. Each has its own set of pros and cons but any could work to accomplish the main goal. Here are the ways you can consider when thinking about giving the gift of college during this special time:

529 Plan

The best option for most people will be to give money through a 529 plan. A 529 plan is a special tax-advantaged account with the specific purpose of helping people save for college. Withdrawals from the plan later on that are used for qualified college expenses, such as tuition, are tax-free.

A 529 plan allows you to contribute to an account with a specific beneficiary and then grow the total account over time by investing in the market. This is one of the best ways to grow what you can contribute and help your loved one benefit by having more money for school.

You can contribute to an existing 529 plan if one exists for the person you want to gift the money to, or you can set one up on your own and name that person the beneficiary. The person doesn’t even have to know it exists until you want them to use it. You could give this type of gift every year by contributing to the account and providing a huge gift of the entire account total down the road when they go to school.

Savings Bonds

You could purchase some savings bonds for your loved one and give them to them for safekeeping so that they can cash them in when it’s time to go to school. This is a good way to have your money slowly growing, but it will grow very slowly.

Savings bonds often get misplaced and rarely have a value much higher than what you paid for them, even several years down the road. If you just want to make sure your loved one doesn’t touch the money for a long period of time then this might be a good fit.

Write a Check

Some individuals will just simply write a check and tell their loved ones that the money is for their future college. You could even write a check and open a savings account with it. The problem is that the money isn’t that likely to actually go towards college as it will probably get spent beforehand. Plus, the money won’t grow over time very substantially, even in a high-yield savings account.

Open a Custodial Account

Custodial accounts exist, such as UTMA accounts, and you can contribute to them in order to help your child save for college. The benefit of a UTMA account is that the money is flexible and can be used for a number of different expenses, not just college. That can also be a con though.

The UTMA account is owned by the individual that benefits from the account. It is considered a custodial account and the individual cannot withdraw funds until they come of age. They differ from 529 plans in that you can’t change the beneficiary and you don’t own the account, which you can with a 529 plan. You also are required to pay taxes on the increase every year instead of when the money is withdrawn.

The right way for you to gift the gift of college savings will depend on how much money you have to give and how you would like to set it up. However, it is difficult to beat the combination of growth potential and tax savings that the 529 plan brings to the table. It was created for people like you to help the next generation save for college and can be the perfect gift for your loved one.

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.

One of the best benefits of using a 529 plan for gifts is that anyone can contribute to a single 529 plan. You don’t have to be the account holder or the beneficiary to give funds to help grow the total college savings for that beneficiary.

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 contributions 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. 

Can You Return a 529 Plan Contribution Gift? 

You can always return the money, however, there are consequences. As soon as the money is received into your 529 plan then it will be mixed with all of the other funds in the account. This means that there is no way to divvy up the funds once the contribution is complete. 

If you return the money then it will look like a withdrawal payment that you’re making from the 529 plan to the individual that provided the gift. This withdrawal will be taxed at the beneficiary’s normal tax rate since it isn’t a qualified college expense. 

529 Plans That Offer Digital Gifting Platforms

The Bottom Line

Giving the gift of college savings is one of the most practical gifts you can make, regardless of the celebration. College is just getting more expensive and the more you can lighten the burden of anyone planning to go to college, the better off they will be. Plus you can get your own tax benefits for making a monetary gift as well. 

Frequently Asked Questions (FAQs)

How will I know if I received a gift?

The person providing the gift will need to get your account information before making the contribution. How you get notified of a contribution depends on the 529 plan you have but the account owner will typically always be notified when there is a new contribution. 

Can people making gifts see my 529 account information?

No one making contributions will be able to see the details of the 529 account except the account owner and the beneficiary. Your account information, including how much the account currently has balanced will remain confidential. 

Is there a minimum or maximum gift amount? 

There is no minimum gift amount unless the 529 plan provider requires a certain dollar amount to process a contribution. There also isn’t a maximum gift amount, other than the total contribution limit for any given beneficiary. You can’t go over that amount for the life of the 529 plan. The maximum amount varies by state and plan but ranges from about $235,000 to $550,000. 

Does the gift count toward my 529 contribution limit?

Yes, the gift will count toward the contribution limit for a beneficiary in the state the plan is administered. You cannot receive money as a gift into your 529 plan that exceeds those limits. 

What is considered a 529 plan gift? 

Any money that is contributed to a 529 plan that wasn’t contributed by the beneficiary is considered a gift. This includes contributions made by an account holder that is separate from the beneficiary, such as a parent of the college student.