During the holiday gift-giving season, supplementing the toy-to-be-tossed away or outgrown with a gift to grow a college fund can bring joy years from now.
According to the College Savings Foundation, 65% of parents will ask friends or family to contribute to their child’s 529 plan during the holidays or for a birthday or other special occasion. In 2023 and into 2024, more than $1 billion was gifted into 529 plans.
It’s never too early – or too late – to help build a nest egg for college. And now that 529 savings can be used for more than just college expenses, contributing to a child’s savings account seems all the more wiser.
Here’s how you can help bring joy to this holiday gift-giving season and many more to come.
1. Make a Gift to a Child’s Existing 529 Plan
Ask the parents which 529 program the child is currently enrolled in and use this super easy interactive map to learn which gifting options are available for the child’s plan.
In addition to the 529 program-specific options identified through the link above, companies such as Gift of College and Backer also offer gifting platforms into just about any 529 program. Gift of College cards can be purchased online at Walmart and on the Gift Card racks at select CVS locations and other retailers. Or you can personalize a gift card on the Gift of College website.
The College Savings Foundation is dedicated to helping families save and their members have many gifting platforms which you can find here: CollegeSavingsFoundation.org.
2. Start a 529 Savings Plan
If a child does not have an existing plan, start one for them. A 529 Plan is one of the most popular ways to save and gift money for a child’s (grandchild’s, niece/nephew’s, friend’s) future college expenses.
Although we’re mostly talking here about gifting to children other than your own, don’t forget them too! If you do not have an account for each child, open one today. They are free to open and many can be funded initially with as little as $25.
Finding a suitable plan has also become easier. The National Association of State Treasurers offers this free tool to find and compare 529 plans.
There are two ways you can open 529 plans: directly from a state (“Direct-sold”) or from a financial advisor (“Broker-sold“ or “Advisor-sold”). Most states offer each type of plan and all carefully monitor them. Broker-sold and Direct-sold Plans have many common characteristics. You don’t have to be a resident to invest in a particular state’s plan. And the states contract with professional money management firms who assemble the various investment portfolios and securities options.
There are advantages to both approaches. Direct-sold plans often have lower costs because there aren’t any advisory fees, and overall expenses are often lower. Advisor-sold plans are managed by large investment firms who make these plans available to their customers. With the benefit of a professional financial advisor comes a larger fee for having an Advisor-sold account. Fees for Broker-sold plans are greater than fees on Direct-sold plans largely because of the perceived added-value of the financial advisor.
Although all 529 plans were created under Section 529 of the Internal Revenue Code and therefore share many similarities, each state can offer state tax credits or deductions and make other state-specific policies such as maximum and minimum contribution amounts.
When considering which plan to purchase, factor in the long-term investment results (which, of course, are not predictors of future returns), fees, any applicable state tax benefits, and other attributes you may find important, i.e., maximum or minimum contributions, etc.
3. Understand that 529s are Loaded with Benefits to Help Savers
These tax-advantaged savings accounts offer numerous benefits that make them an attractive option for long-term educational planning:
Tax Advantages
- Tax-Free Growth: Earnings in a 529 plan grow tax-deferred, and when the funds are used for qualifying educational expenses, they are withdrawn tax-free.
- State Tax Deductions: Many states offer tax deductions or credits for contributions to a 529 plan, which can lower your state income taxes. Try this 529 State Tax Deduction tool to estimate such benefits that may be applicable to you.
- Gift Tax Benefits: Contributions to a 529 plan count as gifts. In 2024, each filer can gift up to $18,000 ($36,000 for joint filers) to anyone without triggering any taxes for the recipient. For 2025, the Gift Tax Exclusion increases to $19,000/filer. 529 plans have a unique feature, a five-year gifting option, that permits a lump-sum contribution of up to five years’ worth of annual exclusions — potentially gifting up to $90,000 ($180,000 for joint filers) in 2024 without triggering gift tax. For 2025, that five-year option will increase to $95,000 ($190,000 for joint filers).
Flexibility and Control
- The beneficiary can use 529 funds for a wide range of qualified educational expenses, including tuition, fees, room and board, textbooks, and even computers, as well as for student loan repayments of up to $10,000.
- As the account owner, you remain in control of the account. You direct how the account is invested. And you can change the account beneficiary for any reason to just about anyone you designate, including yourself.
- The account is not considered part of your estate for estate planning purposes.
Wide Usage
- The funds in a 529 plan aren’t limited to traditional four-year colleges. They can be used for vocational schools, K-12 tuition, community colleges, many apprenticeship programs, and even some international institutions.
- 529 proceeds can also be used to pay down student loans.
- Any leftover funds may be eligible to be rolled into the beneficiary’s Roth IRA.
4. Considerations in the Coming Years
Be mindful of:
- Changes to Tax Rules
- Stay up to date with federal and state tax laws, as they may change. For instance, some states may offer state income tax deductions for 529 contributions, which can make contributing even more beneficial.
- The Annual Gift Tax exclusion changes periodically. As noted above, for Tax Year 2025, the Gift Tax Exclusion will increase to $19,000 for single filers and $38,000 for joint filers.
- Potential Beneficiary Changes
- Remember, you have the flexibility to change the beneficiary of a 529 account at any time.
Conclusion
Gifting college funds is one of the most generous and meaningful ways to support a student’s future. Whether you choose to contribute to a 529 Plan, leverage a gifting platform, or maximize your gifts through annual contributions, there are many ways to make a lasting impact. These options not only help students pay for their education, but also provide tax benefits to those making the gifts.
By thinking ahead and contributing to a 529 plan or utilizing the tools available through platforms, you can provide a future-focused gift that can make a significant difference in a student’s college experience — and beyond.
If you’re looking for a smart, effective gift for the holidays or a birthday, buy a toy if you must. BUT be sure to make a gift to a 529 plan as well. It will be very fulfilling knowing your gift will grow to help shape the future of a student’s education.