Looking for a gift for the kid who has everything? Skip the millionth set of Legos or pair of designer jeans, and give a gift that will truly last a lifetime: a college savings account.
Not sure how to go about opening or contributing to a 529 account this Christmas? Take these steps to get started:
1. Talk to the parents
You can open a college 529 account for pretty much anyone, as long as you have the individual’s Social Security number. But just because you can open an account for your niece, nephew, grandchild or best friend’s second cousin once removed, doesn’t mean you should.
You’ll likely have to get the minor-in-question’s Social Security number from his or her parents, and you’ll also need to have a conversation with the parents about any college savings they might have set up.
While family members can contribute an unlimited amount of money to a child’s college savings account, it’s possible for a kid to have too much college savings. The money in a 529 account must be used for qualified college expenses, or withdrawals will be hit with steep penalties and fees.
So you want to be sure that the parents haven’t already fully funded a kid’s college account. If they have, you’ll have to find another way to give. (A UGMA account could be a good secondary option.)
Now, if a child’s parents haven’t opened a 529 account, then you have two options. You could ask the parents to open an account with the child as beneficiary, or you could open one on your own.
Be sure before you make any of these decisions that you and the child’s parents fully understand the future financial aid implications of each of these options. You can check out our Complete Guide to 529 Plans for more information on this.
2. Write a check
If the parents have opened an account – or decided that’s what they want to do – then you just have to contribute to the account whatever amount you want. (Though you do want to be sure the beneficiary won’t get hit with gift taxes! Learn more about that from this Forbes article.)
You may want to write a check directly to the beneficiary or his/her parents, so that it can be put in the 529 plan. Another option is to contribute directly to the plan, if it allows third-party contributions. Typically, you’ll need the account number for this.
Some plans also allow account owners to send special emails that will let you directly contribute to an account online.
3. Research your options
If you decide to open an account for a beneficiary on your own, you’ll want to research the best account options. Our 529 guide offers more details on how to choose the best plan for you and the beneficiary, but here’s a quick overview of what to look for:
- Tax benefits: In some states, you can get a state income tax write-off for contributing to a 529 account – even if the beneficiary isn’t your child. Check to see if your state offers any tax write-offs for 529 contributions.
- Investment options: Some 529 plans offer more flexible investment options than others. If you’re a confident investor and like making your own investing choices, choose a plan that allows this. Otherwise, you may want to look for a plan that offers age-based investing, which is more aggressive for younger kids and grows more conservative as a child nears college age.
- Customer service: As with all financial products, it’s important to look at customer service when it comes to 529 accounts. You want to know that you can easily and quickly get your questions answered, or solve potential problems with the account in the future.
- Other benefits: Some 529s come with other benefits, such as being linked with Upromise, a program that puts shopping and credit card rewards directly into a child’s 529.
4. Choose and open a 529.
Once you know which state’s 529 program you want, opening an account is simple. Like opening a bank account online, you can open a 529 account online. You will need the beneficiary’s Social Security number, birth date and other personal information.
When you’ve opened a 529, you can contribute any amount to get started. Many programs have an opening amount as low as $10. You could set up monthly or annual contributions, or just put in money when you feel like it.
Once the beneficiary is nearing college age, be sure to have a conversation about how you’ll distribute that money and how it will be used.
(Hint: If the account isn’t controlled by the student or the parents, it’s best to leave the money in the account until the student’s last year of college when a distribution won’t count heavily against the next year’s financial aid outcomes. Read more about that in our Complete Guide to 529 Plans.)
5. Give the gift creatively.
Once you’ve opened a 529 account for the kid who otherwise has everything, you might want to come up with a creative way to present the gift.
For younger kids, just tell the parents about the account, so they’re aware of it. But for kids old enough to understand some money basics, you could print out a compound interest graph that helps illustrate how much today’s gift will be worth in five, 10 or 15 years.
That’s a great way to get kids excited about saving and to help them understand the value of a gift that they can’t necessarily see right now.