“I know this sounds like a cliché, but 529 plan contributions truly are gifts that keep on giving. A decent education will pay you back the rest of your life. A video game, TV or clothing will be gone in a few years.”
We all can recall getting holiday gifts that we didn’t ask for and really didn’t need. But who doesn’t need a college savings program? College savings plans, known as 529 plans, are offered by every state. Put college plan contributions on your shopping list for your college-age children and grandchildren. You can also give this gift to yourself, your spouse, or other relatives. With a 529 plan, you can easily change beneficiaries or set up a plan for yourself or a partner.
CBS MoneyWatch’s recent article, “5 reasons to gift a college saving plan contribution,” lays out five good reasons for investing in a 529 plan this holiday season:
Taxes. 529 plans have some nice tax benefits. While the contributions are after-tax, the earnings within a plan are tax-free. Some states also give residents a write-off for contributing. There are 33 states and DC that offer a state tax break, but remember that you’ll be taxed if you use withdrawals for non-college expenses.
Financial Aid. The assets in 529 plans won’t significantly impact a student’s financial aid prospects, because the funds are in the parents’ names. When a school calculates a student’s Expected Family Contribution (EFC), there is a maximum of 5.64% of parental assets that are counted—much lower than other student assets, which are counted at 20%. A higher EFC means less financial aid.
Tuition Discounts. Target colleges to get tuition discounts, such as prepaid plans that let you lock in today’s tuition rates.
Estate Planning. These contributions are helpful in estate planning. Grandparents should note that your contribution qualifies for the $14,000 annual gift tax exclusion, which lets most people make larger contributions without a gift tax.
No Limits. Don’t worry about contribution or age limits. The contribution limits vary by state and range up to $500,000. There are no age limits on who can contribute.
In addition, all plans offer “age-based” or “risk-adjusted” portfolios, which means that professional managers select mutual funds for you and reduce stock- and bond-market risk, as the child ages. You can also go to graduate school, even if you have no children with a 529 plan. As long as the money is used for college-related expenses, there’s no tax.
When shopping for a 529 plan, keep in mind that the lowest-cost plans are “direct-sold” programs. They don’t charge a commission and have lower expenses than adviser-sold plans.
This holiday season, ask grandpa, grandma, aunts and uncles to make cash contributions to a 529 plan, because a debt-free college degree is a fantastic gift.
Reference: CBS MoneyWatch (November 28, 2016) “5 reasons to gift a college saving plan contribution”