- Close to half of parents in a survey said they may ask for contributions to a 529 college savings account in lieu of a traditional holiday gift.
- These state-sponsored plans generally have made it easier to contribute to someone else's account.
- There may be a tax break at the state level for contributions.
Looking for a meaningful holiday gift? Consider putting money toward a child's future education costs.
Nearly half of parents (45%) may ask family and friends this year to contribute to a 529 college savings plan for their kids, according to a survey from the College Savings Foundation. That compares with 83% of parents who would welcome such contributions in lieu of traditional presents, research from Fidelity Investments shows.
"It's a smart gift," said Mary Morris, CEO of Virginia529, a state agency. "And 529 programs have made it easier to do."
There are roughly 15.3 million 529 accounts held across the country, with $464 billion in assets, according to the College Savings Plans Network. They can be used to cover higher education costs, as well as private or religious school tuition through grade 12 (up to $10,000 per year), student loan repayment ($10,000 lifetime maximum) and expenses related to a certified apprenticeship.
Assets in these state-sponsored accounts are invested and grow tax-deferred, and as long as the money is used for qualified education expenses, distributions come with no federal tax (and, in many cases, no state tax). Generally speaking, assets are invested in age-based portfolios, which start off with higher stock exposure early in a child's life and then become more conservative as the college start date approaches.
College isn't getting any cheaper. For the 2021-22 school year, students enrolled at a public four-year school can expect to pay an average of $22,690 for tuition, fees, and room and board, according to the College Board. The average at a private college is $51,690.
While financial aid (e.g., grants, scholarships and loans) is available to students who qualify, setting aside money for future expenses can lessen the sting of the eventual price tag. And, Morris said, even small contributions help.
Most 529 plans offer a way for friends or family to gift money to an account, Morris said. For example, Virginia529 allows you to make a direct contribution through its online portal and also has gift cards that can be digitally delivered or purchased at some retailers.
Many other states participate in a service called Ugift: Parents get a unique code that can be provided to family or friends, who use it to contribute to the 529 account online. It's also worth checking a plan's website to see how gifts can be made.
While there is no federal tax deduction that comes with 529 contributions, there may be a state tax break, depending where you live and what plan you're investing in. Some states only allow the account owner to take a deduction for contributions, while others let non-account owners get a tax break for their gifts.