Compounding returns is a great notion. The more time to compound, the better. One way to see this in action, is to start funding 529 college savings accounts for your children or grandchildren today, long before they have kids or are even married.
Kiplinger just published an article, “529 College Savings Plans for the Unborn,” that explains this seemingly silly notion.
The article notes that 30 years ago, the annual out-of-state cost of a state university was about $5,000. Today, one year at an out-of-state university could easily cost $40,000 or more. Therefore, if you’d like to help your future grandchildren afford to go to college, consider funding 529 college savings plans now.
The real advantage of a 529 savings plan is that the money they don’t use for college, will continue to grow tax-deferred and can be used for their own children just by changing the beneficiary. The grandparent still has ownership of the account, meaning they won't spend the money on something other than college.
If you need access to those funds, the earnings (not the contributions) are subject to federal and state income taxes and a 10% federal penalty. Money in 529 college savings plans grows free of state and federal taxes, and if/when it’s withdrawn and used for qualified higher-education expenses, it will also be tax-free.
There are no maximum annual contribution limits. However, there can be gift tax consequences if you give more than $14,000 per year or $28,000 for couples. The account can be front-loaded, up to $70,000 ($140,000 for couples) in a single year without gift taxes, if you don’t make any other gifts to the beneficiary that year or for the next four years. Money can be contributed until it reaches the limit, which varies by state.
If your daughter or granddaughter has graduated from college and is single, instead of waiting until you pass away to give her money as an inheritance, you might start a 529 college savings program (or keep hers if you still have it) with you as the owner and your daughter or granddaughter as the beneficiary and successor owner.
If you pass away before all this happens, designating your child or grandchild as the successor owner allows him or her to take over the account with their own child as the beneficiary. The beneficiary can be changed to another family member, if the initial beneficiary chooses not to attend college.
A 529 plan provides great tax efficiency, since once your money is deposited in the plan, the growth should never be taxed again when it’s used for qualified expenses. It allows you to keep control over the money while you are alive and you have many investment options. It’s also very flexible: the plan beneficiary can be easily changed among family members. You can also get a state income tax deduction for your contributions, depending on your state.
Reference: Kiplinger (March 2017) “529 College Savings Plans for the Unborn”