Click acknowledge to continue.
by Alicia Adamczyk
June 15, 2018
by Alicia Adamczyk
June 15, 2018
You don’t have children of your own, but you’d like to help your friends’ kids pay for college. Here’s what you need to know about gifting a 529 account.
This is what individual experts have to say generally about an issue that affects each person differently—if you want personalized advice you should see a financial planner.
This is undoubtedly a kind offer, Matthew, and anyone is allowed to set up an account for any child at any time. It’s not exactly a gift, though. Rather, you open the account in the beneficiary’s name, and you make the investment decisions. It’s generous nonetheless, but before you do that, first make sure it’s what the parents want. Talk to them about their needs, and see if they already have an account open that you can contribute to. Some institutions let parents set up 529 gifting pages that friends and other family members can contribute to without incurring a fee. The Gift of Education is another registry (they offer gift cards so you can give a tangible gift, though you redeem them through the website).
This is important to consider because opening the account yourself could make calculating financial aid complicated. Distributions from an account not owned by the parent or student are considered untaxed income for the student, and therefore could seriously reduce the amount of aid they receive, giving your friends a major headache down the road. “A parent-owned plan is more flexible when it comes to paying for college,” says David Haas, a New Jersey-based Certified Financial Planner. “But you have to get the new parents to open a plan before you can make your contribution to it.” So if they don’t have a single account themselves, consider asking them to open one and let you make a contribution to it. Otherwise, talk to a financial professional about the financial aid implications.
But if you decide that opening up one yourself is the way to go, you’ll need the beneficiary’s Social Security number, as well as other personal info like their address and birthday. And note that you’ll need to open separate accounts for each friend’s kid.
You’ll first want to consider the 529 in your state if your state offers a tax deduction for the contributions. (Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania offer tax parity for 529 plans, meaning you can contribute to any state’s plan and receive the deduction.) Otherwise, shop around. Of course, a lot of this will depend on your investing savvy, and you should look for a program with low fees. “Most 529s have fairly low fees already, but you should compare several,” says Juan Ros, a California-based Certified Financial Planner. Morningstar has a list of the best accounts, and SavingforCollege.com is another great resource that lets you easily compare plans.
If the beneficiary you initially names happens to get a full-ride to attend college, you can “simply name a new beneficiary,” according to Ros.
There’s no limit on what you can contribute per se, but keep in mind the gift tax exclusion is $15,000 per beneficiary in 2018. There is a special exception to this rule for 529 accounts, which allows someone to gift five times that amount in one year. In other words, you could give up to $75,000 to one beneficiary without hitting the gift tax, as long as the contributions are spread over a five-year period. Lucky friends! (On a serious note, this isn’t so much a common financial decision for a friend to make—it’s usually an estate planning move made by grandparents.)
But know that there’s a lifetime limit on contributions in that the total amount saved can’t exceed the expected cost of the beneficiary’s qualified college expenses (which includes tuition, room and board, etc.). This limit varies by state but is somewhere between $235,000 and $520,000. If you surpass that, the money will be hit heavily with fees and taxes.
How you want to contribute should also influence whether you open the account yourself or contribute to the parents’ account. For example, if you’re making a one-time contribution, it doesn’t really make sense for you to open your own. But if you’re making automatic monthly contributions, as the plans allow, it may make more sense. Again, that’s something to work out with your friends.
Beyond that, you could give the old standby of bonds or cash, earmarked for college expenses. Of course, you won’t get the tax-free growth, in that case, so talk to your friends about their financing plan.