Looking for a gift for the kid who has everything? Skip the millionth set of Legos or pair of designer jeans. Instead, 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.
First, you should talk to the child’s parents. For one thing, you’ll need the minor’s Social Security number. Plus, using money from accounts controlled by someone other than the child’s guardian can be problematic for student aid calculations. Generally, it’s best to contribute to an account that the parent owns with the child as a beneficiary.
Plus, having too many savings accounts can be confusing when it’s time to pay for college. And it’s possible to have too much money saved for college. New federal rules have expanded the potential use for 529s to include private elementary and secondary tuition. But unless the child in question is likely to go to private school, you can save too much for college. Beneficiaries can only use this money for qualified educational expenses. Otherwise, the government hits the withdrawals with steep penalties and fees. So it’s not wise to have more in college savings than a student will actually use for college.
If the child’s parents have already funded the child’s college account, you’ll be better off funding a UGMA account or trying another giving option.
What if the child’s parents haven’t started saving for college? In this case, you’ve got two options. One is to ask the parents to open an account with the child as a beneficiary. Then you can contribute to the account. Most accounts these days offer easy online contribution options that anyone can use. The other option is to open a 529 on your own, naming the child as a beneficiary.
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, you just have to contribute to the account whatever amount you want. For 2017, you can give another individual up to $15,000 before you trigger the gift tax.
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. Sometimes, you’ll need the account number for this. But many plans now allow owners to send a link that will let you directly contribute to the plan without having any of the plan information on hand.
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. 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. If your state offers such benefits, opening a second 529 account, even if the parents already have one, may be a good idea.
- 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 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 for a child 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, talk to them 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 next-to-last year of college when a distribution won’t count heavily against their senior 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, 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. It also helps them understand the value of a gift that they can’t necessarily see right now.