When the holidays approach, some people know just what gift they plan to give each loved one. But others have no idea what their loved ones want or need. This is one of the more stressful aspects of the holidays that can detract from the joy of the season.
If you have a 529 account set up to save money for your children’s education, why not let loved ones know that a contribution to that plan would be an incredibly useful and much-appreciated gift?
Gifts to your child’s 529 account can help you reach your savings goals faster. And it gives those close to your family a chance to contribute to your child’s future in a meaningful way — and to meet their own estate-planning needs.
Plus, when relatives and friends make a financial gift to your 529 plan, it gives you and your spouse an opportunity to teach your children about the value of education and saving for the future. As you coach them in thanking loved ones for their financial gifts, it helps them learn just how meaningful those gifts are.
About 529 plans
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Legally known as “qualified tuition plans,” 529 plans are sponsored by states, state agencies or educational institutions and are authorized by Section 529 of the Internal Revenue Code. There are two types of 529 plans: education savings plans and prepaid tuition plans. Most education savings plans are available to everyone, but a few have residency requirements for the saver and/or beneficiary. Prepaid tuition plans typically have residency requirements. One exception is a prepaid tuition plan sponsored by a group of private colleges and universities.
The person who opens the 529 plan account is called the “account holder” or “saver.” The person the account is opened for is called the “beneficiary” or the “student.” The account holder and the beneficiary can be the same person.
Because it is a tax-advantaged savings plan, the 529 can help you save on both the cost of education and your income taxes.
When presenting the idea to loved ones of contributing to your 529 plan, they might be happy to hear that they making gifts to 529 accounts can help them with their estate planning.
In 2023, the annual 529 plan contribution limit is $17,000 per contributor. So in 2023, a couple can gift $34,000 (each partner can contribute $17,000). In 2024, the annual 529 plan contribution limit rises to $18,000 per contributor. Givers will not have to pay a gift tax or erode their lifetime gift tax exclusion. Once the annual gift has been made to the 529 plan, the money is no longer considered part of the giver’s estate, for estate tax purposes.
There is good news for your own family, as well. When you receive financial gifts to your 529 plan, you generally will not owe taxes on the amount you receive.
But what if your child ends up not going to college?
Some people hesitate to set up a 529 plan because they aren’t sure if their children will even go to college. They’re afraid that if they save money in the plan and then their children opt out of college, they will lose a good portion, or all, of their savings. That is not true, thankfully.
You can use a 529 plan at any eligible institution of higher education — not only at four-year colleges and universities but also at qualifying two-year associate degree programs, trade schools and vocational schools — both in the United States and abroad. You also can use a 529 plan to pay for an education at a private high school. However, state laws have different rules, so work with your advisor if you plan to use a 529 plan at a private high school.
Also, if you set money aside in a 529 plan and it turns out that you cannot use the money for your child or another relative’s education, you can change the beneficiary to another child or relative. Also, you can use that money to fund your own return to school for a degree.
If the worst-case scenario happens and you end up being unable to use that money for any type of educational expenses, you will pay a 10 percent penalty and federal income tax on the growth, but not the principal, od that withdrawal from your 529 account. With so many options for using the money, that doesn’t happen often.
The SECURE Act 2.0, which was signed into law in December 2022, includes a provision that gives parents the option to make tax-free rollovers of up to $35,000 from 529 tuition savings plans to Roth IRAs. You can make this change at no cost if your 529 plan is at least 15 years old. If that’s the case, then that money from your 529 plan will go into the Roth IRA account of your 529 plan’s beneficiary.
If your child is the stated recipient, his or her retirement fund will get the boost — not yours. The Roth IRA contribution cap determines the yearly transferrable amount. That limit was set at $6,500 in 2023, and people over 50 are allowed an extra $1,000 as a catch-up allowance. You cannot make rollovers on any contributions or earnings made in the past five years.
There are a few really forward thinkers out there who set up 529 plans for their children’s education before they even have children! This is perfectly legal. Just name yourself as the beneficiary, and then when you have your first child, name him or her as the beneficiary on the 529 plan.
As with any financial effort, the earlier you start, the more time you have to take advantage of compound interest to grow your money over time. Also, small amounts add up. So if it feels awkward to ask your loved ones to contribute to your child’s 529 plan for the holidays, you do not have to ask them to contribute a lot of money. Whatever amount they give will help you add to the fund.
If you do not have a 529 plan for your children’s education and aren’t sure if it’s right for you, meet with your financial advisory team. They will guide you on the optimum way to save for your children’s education, given your unique situation.
If you do have a 529 plan, start planning now for how you will approach your loved ones with this idea. It might just become a treasured holiday tradition that benefits everyone involved.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.
Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 college savings plans before investing. More information about 529 college savings plans is available in the issuer’s official statement, and should be read carefully before investing.