The bigger your family is, the more often you have to answer the question, “What would your children like for their birthday, the holidays, or for getting straight A’s?” (Okay, wishful thinking on that last one. No straight A’s in my house.)
And the more gifts your children get, the bigger the pile of stuff you have to deal with. More things to keep track of, buy batteries for, trip over, and figure out when it’s time to give it away or throw it away.
Don’t get me wrong. I am grateful for every person who cares enough about my child to give them a gift. Whatever it is and whatever occasion it’s for. But as a naturally frugal person, I hate to see all that money spent on clothes that will be quickly outgrown or toys that will be played with a few times and discarded. Especially as I work to save for my kids’ college expenses to help them avoid the burden of large loans someday.
Wouldn’t it be nice if some of that money could be spent for something your kid will never outgrow – like a college education? Well, if you have a 529 plan for your child, that’s actually a wish that can come true, because anyone can contribute to your child’s college savings plan. You just have to get your family on board.
How Family Can Contribute to a Child’s 529 Account
Anyone can contribute to a 529 College Savings plan to give your child a gift that can grow over time and help them afford the astronomical costs of college. And it’s becoming a more popular option. In fact, gifts from grandparents and other relatives to 529 plans have been a growing trend, according to Pam McNulty, a senior director in TIAA’s Tuition Financing Group, a large investment company that manages 529 plans for many states.
A 529 account is a great way to save for college expenses because the money grows tax-free. And if the account is held by the custodial parent (as opposed to grandparents or other family members), withdrawals to pay for school aren’t counted as income for financial aid applications. An important factor when you’re trying to maximize aid benefits.
You may be thinking, “Great, but how do I actually make this work? Am I going to have to jump through hoops and have lots of uncomfortable conversations with family?” Probably not. In many cases, a contribution is just as easy as Grandma ordering that Fisher-Price toy from Amazon.
Using E-Gifting For 529s
TIAA, for instance, has created an eGifting option that allows you to give anyone interested in donating to your child’s college fund a special code that’s unique to your account (without having to give out your account number). Then, they can go to the website and electronically contribute money directly into your 529 account. There’s also an option to send in a check, which might appeal more to your technology-leery grandparents, or they can send you a check and you can deposit it.
Many other large 529 companies have similar programs and these tools are getting easier to navigate with each passing year. Fund managers that have added gifting options report they are seeing a substantial increase in gift contributions to 529 accounts. Fidelity, for instance, saw a 40% increase in 2017 compared with the previous year after instituting their program.
“E-Gifting has been around for a while, but in the last five years we have really begun promoting it around the holidays and graduations,” McNulty said. “People are always asking what gifts to give, so we’ve made a concerted effort” to provide an easy way to make a gift to an account.
So, family members and close friends can make contributions without filling out paperwork and jumping through hoops. You just have to ask.
Asking for 529 Contributions
Any time you’re asking for money, it’s uncomfortable. Gift-giving culture makes many people believe cash gifts are tacky and that depriving your kids of shiny new toys and gadgets is Grinch-like. But there are ways to navigate these conversations without feeling like you’re spamming your family.
While some investment companies offer a feature that allows a 529 account owner to create an “invitation for a gift-giving occasion and email it out or post it to social media, you probably won’t have luck with this tactic. Not only will you likely hit people who will take some offense to your request, but you’ll also miss a good opportunity to have a conversation about your values and goals with the people close to you.
Make the request for 529 contributions over gifts in person and only to people who actually have a stake in your child’s future – grandparents, aunts and uncles, and godparents. Grandparents are the most likely to contribute to a 529, and yours may just be waiting for you to ask, according to a survey by Fidelity Investments. 90% of grandparents surveyed said they’d be willing to make such a gift if their children or grandchildren asked.
When you approach the topic with your family, tell them how important you think education is and how hard you’re working to help your child graduate college without a mountain of debt. Share your savings goals. If you’re trying to teach your kids not to be overly materialistic, share that as well. (Also, if you’re still dealing with your own college loans, it’s fair to point out that you’d like to keep your child from that fate.)
One of my favorite things to discuss is my child’s dreams. Talk about how Zane wants to be an astronaut or Emma hopes to be a doctor. Then let them know how meaningful a 529 contribution will be to them now and in the future.
Also, keep an idea for a small traditional gift your children would appreciate in the back of your mind. Many people will want something to wrap, even if they choose to send a monetary gift. And if the person you’re talking to seems offended by the ask, you’ll be able to offer them something else without creating an argument.
Handling Small Gifts
One chief concern of close family that keeps them from contributing to a 529 account instead of buying a gift is that their gift will be too small. The $15 they usually spend on a toy for your child might seem foolish when compared to the astronomical cost of college. Be sure to let your family know that you don’t expect anything extravagant. Even a very small gift of $5, $10, or $20 can add up over the long-term.
The earlier you can get relatives in the habit of making contributions to your child’s 529 plan, the better. The longer that money is in the account, the more time it has to grow and the more your fund will benefit from the benefits of compounding growth. Even a small gift can make an impact when invested for 18 years.
Other Benefits of 529 Gifts
Starting the 529 gift-giving habit early has another advantage – if Grandma starts the tradition of giving to a child’s 529 plan when they are an infant – along with a small gift if she insists on having something for your child to unwrap – your child will grow up knowing that the gift-giving pattern in your family is to focus on their long-term success and happiness over material gifts. It could be a piece of the puzzle to helping them understand and embrace delayed gratification and the importance of long-term planning.
From the financial side, relatives who give to your child’s 529 plan might even be eligible for a tax break, depending on where they live. Some states offer state tax deductions for parents and others who contribute to a state 529 plan. (Don’t make any assumptions about who’ll get a tax break, however. Check with a tax expert to see who, if anyone, qualifies in your state. Especially if you want to mention the possible tax benefits when you suggest a relative make a contribution).
529s and the Gift Tax
While we’re talking taxes, let’s talk about 529s and the gift tax. Monetary gifts over a certain amount may require the recipient to file a tax return and possibly pay a gift tax.
Luckily, contributions to a 529 plan are subject to the annual amount that can be excluded from the gift tax, which is $15,000 per year for each recipient, according to Victor J. Medina, an estate planning attorney with Medina Law Group and Private Client Capital Group in Pennington, New Jersey. However, “many people mistakenly believe that gifting over $15,000 will cause a tax and that’s not necessarily true. If you gift over $15,000, you have an obligation to file a gift tax return. But the giver only starts to pay taxes on those gifts if your lifetime gifts exceed approximately $11 million per spouse per person,” he said.
A very high bar to hit. (Problems to have, amiright?)
Asking for College Fund Contributions Instead of Gifts
A contribution to your child’s college fund can go a long way, especially if your child is young and their investments have the time to grow. If you would rather your family help your child afford college instead of giving other gifts, approach them honestly. Explain why it’s important to you and your child and let them know how they can contribute easily. Then, step back and let them decide what to do.
Whether your family contributes to your child’s 529 plan or brings a sweet gift, thank them and enjoy the occasion. And make sure your kids do too.
Has your family ever opted to donate to your child’s college fund instead of giving a traditional gift? Share how you successfully arranged things in the comments!