Not sure how to go about opening or contributing to a 529 account for someone else this Christmas? Here are the steps you’ll need in order to get started:
1. Talk to the Parents
You can open a college 529 account for pretty much anyone, as long as you have their Social Security number. But just because you can open an account for your niece, nephew, grandchild, or best friend’s second cousin once removed, it doesn’t mean you should.
Before doing anything, you should talk to the child’s parents. For starters, you’ll need the minor’s Social Security number, which you likely don’t already have.
You’ll want to keep in mind that using money from accounts controlled by someone other than the child’s guardian can be problematic when it comes to student aid calculations. It’s generally 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 comes time to pay for college.
And while it’s not the worst problem to have, it is 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 definitely wind up saving too much for college. This is especially true if multiple people are putting money aside.
Beneficiaries can only use these savings 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 their college education.
If the child’s parents have already funded their college account, you’ll be better off funding a UGMA account or trying another giving option. But what if their parents haven’t started saving for college yet? 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 that account as desired. Most accounts these days offer easy online contribution options that anyone can use, day or night. 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. Send a College Tuition Gift Card
If you don’t feel comfortable broaching the topic with the parents before Christmas or want to keep your gift a secret, you do have another option: a gift card.
Thanks to companies like Gift of College, you can purchase a physical gift card at a number of national retailers, which can easily be credited to the child’s 529 plan. (Additionally, they can also be used to pay down existing student loan debt, if you have older giftees to consider.) All they will need to do is log in with their existing Gift of College account, or create a new one and link their 529 savings account (or student loan account).
Then, all gift card funds can be quickly added and transferred for use. It is free for the student to create their account and transfer gift card funds–you’ll just pay a small fee for loading the gift card, similar to when you purchase a Mastercard or Visa gift card.
This is a great option if you want a tangible gift card to hand over on Christmas Day, or even send in a birthday card each year.
3. Write a Check
If the child’s parents have opened a 529 account already, you simply have to contribute whatever amount you want to it. For 2019, you can give another individual up to $15,000 before you trigger the gift tax. The easiest option may be 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. You may 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 actual plan information on hand.
4. Research your Options
If you decide to go ahead and open an account for a beneficiary, you’ll want to research the best account options first. 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) might 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 investment 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 additional benefits, such as being linked with Upromise, a program that puts shopping and credit card rewards directly into a child’s 529.
5. Choose and Open a 529 Account
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 easily open a 529 account online. You will need the beneficiary’s Social Security number, birth date, and other personal information. Be sure to have all of this available before you start the process.
Once you’ve opened a 529, you can contribute as much or as little as you want to get started. In fact, many programs have an opening amount as low as $10. You could also set up recurring monthly or annual contributions, or just put in money whenever 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).
6. 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. If you decide to fund the account using a tangible purchase, like Gift of College cards, you can put them in a greeting card or gift card box under the tree.
For kids old enough to understand some money basics, you could also 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.