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The holiday season is here once again. While you may be used to spending hours shopping for the perfect holiday gift that your children or grandchildren will love, maybe you don’t even need to leave home at all this year. Instead, you can give your loved ones a gift that keeps on giving: a 529 college savings plan. As college tuition becomes even more expensive, a 529 college savings plan may be the perfect gift to help someone you care about afford the college he or she wants to attend. Take a quick look at what 529’s are all about, so you can learn why they might make the perfect gift this holiday season.
What Exactly Is a 529 Savings Plan?
According to the Securities and Exchange Commission, a 529 plan is “a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as ‘qualified tuition plans,’ are sponsored by states, state agencies, or educational institutions.” The 529 account’s name is derived from Section 529 of the Internal Revenue Code, which authorized the plans after it was added in 1997. Most of these plans offer some sort of tax-deferment or savings benefits for the account holder, which helps to limit tax exposure and optimize education savings. There are two basic types of 529’s: the prepaid tuition plan and the education savings plan. The prepaid tuition plan allows the account owner to purchase some sort of tuition credit at participating schools and colleges, while an education savings plan is an investment account that enables the account holder to save for future school costs.
Who Can Open a 529 Account?
Most states have some sort of 529 savings account system in place, and many financial and investment institutions offer many options for these plans. In most cases, parents, grandparents, and others can choose to open 529 accounts for their loved ones. The owner of the 529 has control over all the investment decisions and can take advantage of the tax incentives associated with these accounts. Alternatively, if your loved one already has a 529 account, you can simply make a gift contribution to that account. In some cases, those contributions may also be tax deductible, but ensure you check with your accountant or tax professional prior to making any decisions.
Why Choose a 529 Plan as a Gift?
A 529 plan is one of the best and most flexible financial gifts you can give a loved one this holiday season. Regardless of where the plan’s owner is, the 529 will follow the same basic rules set forth by the government. For example, when you invest in your state’s 529 plan, the money can be used for any child or grandchild in your family and at any university or college in the state of your choice. In addition, it’ll cover all approved costs, including tuition, books, and room and board. The tax savings are another great feature of these accounts. The money you invest in a 529 plan will increase tax-free, and when funds are withdrawn to help pay for the child’s college expenses, they’re not taxed at that time, either.
Additionally, you don’t have to be independently wealthy to start a 529 account. Many of the plans available permit you start an account with a very small contribution. You could then set up automatic monthly withdrawals from one of your bank accounts into your 529 plan to build the savings over time. A 529 gift account could also become a family affair, where multiple relatives contribute to the account you established to help pay for a loved one’s school tuition. Rebate and payment services such as Upromise make it easy for family members to contribute to many 529 accounts, so building up the savings to pay for college can bring your entire family closer together.
Finally, another great benefit of 529 plans is that they have a limited impact on student aid calculations. When colleges and other institutions are calculating student aid, the funds saved in a 529 are considered the owner’s assets, not those of the student in question. So, if you start a 529 plan for your child or grandchild today, the funds that are ultimately saved won’t be factored into the formulas used to determine the level of financial assistance for which the student is eligible. As always, check with a trusted financial expert prior to making any decisions about withdrawing funds from a 529, so you can make the best possible use of the account.
If you’re interested in learning more about 529 accounts, here’s a great video that discusses them in depth.
An Easy Decision
A 529 account could be the perfect gift for a loved one this holiday season. It could allow a person you care about to attend a terrific school that lets him or her achieve a dream. Additionally, the 529 account could provide you some generous tax savings benefits at the same time. So, what are you waiting for? Talk to a trusted financial advisor, and then set up 529 savings accounts for holiday gifts as soon as you can!