How to Gift a College Savings Account 529
You don’t have children of your own, but you want to help your friends’ children pay for college. Here’s what you need to know about the 529 account gift.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week a question from Matthew:
I am aware of 529 college savings accounts, but I have no children of my own to help. However, several of my friends have children and I would like to give them a gift that is more practical and durable than a stroller, small piece of clothing, or stuffed toy. What do you need to do to gift a 529 account to someone else? Does wealth matter, or can you “look around” to find the state with the most generous plan, even if neither the giver nor the recipient lives there? Is there an upper or lower balance limit for opening one of these accounts, and can I risk the recipient exceeding their upper limit due to a gift? What information is needed about the recipient in order to create an account for him?
A lot of what I read about these accounts has been geared towards getting parents to open accounts for their own children, so I would be interested to know about account donation options (as long as the subject isn’t too niche and specialized).
This is what individual experts usually say about an issue that affects each person differently: if you need personalized advice, you should see a financial planner.
How to present 529
This is undoubtedly a kind suggestion, Matthew, and anyone can create an account for any child at any time. It’s not really a gift, though. Rather, you open an account in the name of the recipient and make investment decisions. It’s generous nonetheless, but before you do, make sure your parents want it first. Talk to them about their needs and see if they already have an open account that you can contribute to. Some institutions, such as Fidelity , allow parents to create 529 gift pages that friends and other family members can contribute to without any fee. Gift of Education is another registry (they offer gift cards so you can make a tangible gift even though you redeem them through the website).
This is important to consider, because opening an account on your own can complicate the calculation of financial assistance . Payments from an account that does not belong to a parent or student are considered tax-free income for the student and, therefore, can seriously reduce the amount of aid you receive, which could give your friends serious headaches in the future. “A parent-owned plan is more flexible when it comes to college fees,” says David Haas, a certified financial planner in New Jersey. “But you have to convince new parents to open the plan before you can contribute.” So if they don’t have an account themselves, consider asking them to open one and letting you contribute to it. If not, talk to a finance professional about the implications of financial assistance.
But if you decide that opening it yourself is the best option, you will need the recipient’s social security number, as well as other personal information such as their address and birthday. And note that you will need to open separate accounts for each friend’s child.
You will first want to consider 529 in your state if your state offers a tax deduction for contributions. (Arizona, Kansas, Minnesota, Missouri, Montana, and Pennsylvania offer tax parity for 529 plans, which means you can contribute to any state’s plan and get a deduction.) Otherwise, take your pick. Of course, this will largely depend on your investment savvy, and you should look for a program with low fees. “Most 529s already have pretty low fees, but you have to compare a few,” says Juan Ros, a certified financial planner in California. Morningstar has a list of the best accounts , and SavingforCollege.com is another great resource that makes it easy to compare plans .
According to Ros, if the recipient you originally named gets a full college trip, you can “just name the new recipient.”
Gift limits
There is no limit to what you can contribute as such, but keep in mind that the gift tax exemption is $ 15,000 per beneficiary in 2018. There is a special exception to this rule for 529 accounts, which allows someone to give five times the amount in one year. … In other words, you can give up to $ 75,000 to one recipient without paying gift tax if the contributions are spread over a five-year period. Lucky friends! (Seriously though, this isn’t a very common financial decision for a friend – it’s usually a grandparents’ estate planning step.)
But be aware that there is a lifetime contribution cap: the total amount saved cannot exceed the expected value of qualified college expenses (including tuition, room, board, etc.). This limit varies from state to state, but ranges from $ 235,000 to $ 520,000 . If you surpass this, the money will be hit hard by fees and taxes.
How you want to contribute should also affect whether you open an account yourself or contribute to a parent’s account. For example, if you’re making a one-time contribution, it doesn’t make sense for you to start your own. But if you’re making automatic monthly contributions if the plans allow it, it might make more sense. Again, this needs some work with friends.
In addition, you can donate bonds or cash to cover college expenses. Of course, in this case, you will not get tax-free growth, so talk to friends about their funding plan.