This Valentine’s Day consider showing your affection to your child or grandchild by giving the gift of college. Flowers, toys and candy and chocolate are nice gestures, but a 529 plan contribution is an investment in a child’s future. 

529 plans: A lasting gift they’ll love

Money saved in a 529 plan grows tax-deferred and can be withdrawn tax-free when used to pay for qualified education expenses. With this tax-free compounding, even a modest gift has the potential to grow significantly over time. 

529 plans can be used to pay for tuition, fees, books, supplies and equipment, computers and internet, and room and board (if the student is enrolled at least half time) at any eligible post-secondary institution. This includes public and private 2-year and 4-year colleges and universities, trade schools and even some international schools. Families can also take a tax-free 529 plan distribution to pay for up to $10,000 in K-12 tuition (per year, per beneficiary). The child can attend a college or K-12 school in any state, regardless of which 529 plan they use. For example, a family living in California can use funds saved in New York’s 529 plan to pay for a child’s tuition at Michigan State University.

If the child decides not to go to college, leftover 529 plan funds can be transferred to a qualifying family member without tax consequences by changing the beneficiary. The account owner can also withdraw the funds at any time for any reason; however, if the distribution is non-qualified the earnings portion will incur income tax and a 10% penalty. The penalty is waived if the beneficiary gets a scholarship, decides to attend a U.S. Military Academy, receives educational assistance through a qualifying employer program, dies or becomes disabled. Parents may also save any leftover 529 plan funds for a future grandchild or use leftover 529 plan funds to pay down a student loan.

How to give a 529 plan gift for Valentine’s Day

529 plan account owners can make lump sum contributions at any time, and most 529 plans also accept gift contributions from grandparents or other loved ones. Gift contributions to a 529 plan can generally be made by check or electronic deposit. Some 529 plans, including 529 plans from Fidelity, allow the account owner to set up a gifting page for the beneficiary that can be shared with friends and family.

Grandparents and other loved ones can also open a new 529 plan for a child. However, distributions from a 529 plan owned by anyone other than a parent can have a negative impact on eligibility for need-based financial aid.

How much to give

Consumers spend an average of around $196 on Valentine’s Day gifts, according to the National Retail Federation. Typical Valentine’s Day gifts like toys and candy can provide instant gratification for a child, but they are usually forgotten within a few weeks. A contribution to a 529 plan, however will continue to grow until the child is ready for college. 

If a parent or grandparent were to contribute $196 to a child’s 529 plan each year on Valentine’s Day from birth to age 18, they would have over $6,600 saved for college, assuming an annual investment return of 6%.

According to Fidelity’s 11th annual New Year Financial Resolutions Study, 53% of Americans aim to save more money in 2020. However, other studies show that only 8% of people achieve their intended New Year’s resolution. Parents who made a New Year’s resolution to save for college but haven’t started saving yet can use Valentine’s Day as an opportunity to catch up.

When you wait to start saving in a 529 plan, you miss out on potential growth from tax-free compounding. Instead of waiting until next January to start your New Year’s resolution, consider depositing two months’ worth of contributions on Valentine’s Day.

For example, if your goal was to save $250 per month, contribute $500 on Valentine’s Day and $250 for each of the next 10 months. Saving $250 per month will pay for about one-third of projected future costs to attend an in-state public 4-year college in 18 years. The remaining two-thirds can be covered by current income and student loans. 

Parents should aim to save $450 per month for an out-of-state public 4-year college and $550 per month for a private non-profit 4-year college. If you can’t afford to save the recommended amounts, start small and aim to increase the monthly contributions each year. Use a college savings calculator to determine how much to save for your child or grandchild.