Can You Give Directly to an Unrelated Child's 529 Plan?

During the holiday season, you may be looking for creative gift ideas for a child who is not related to you. If you're used to buying toys and gadgets, you might consider a more meaningful gift instead, like contributing to a 529-month plan. This can help the student (and their family) prepare for the high cost of a private school or university.

While a child may not initially realize the benefits of their gift, they will certainly appreciate it when it's time to start college.

So how are you going to contribute to an unrelated child's 529 plan? And are there tax implications to doing this? We will examine the answers to these questions below.

What are 529 plans?

These plans are state sponsored tax incentive savings accounts designed to help families save for education expenses. There are two types of 529 plans: prepaid tuition plans, which allow you to purchase credit for future tuition at the current price; and savings plans for education, which involve investing money to grow it over time. Education savings plans tend to be more common and work much like Roth Individual Retirement Accounts (IRAs), with after-tax contributions from parents and others.

Known legally as "qualified tuition plans," 529 plans offer significant tax benefits when funds are used for a variety of elementary and high school college and private expenses. Contributions to 529 plans are invested and increased tax-free until needed to cover the beneficiary's educational expenses.

Eligible expenses that can be paid with education savings plans may include tuition, books, room and board, and classroom supplies.

Can I contribute to an unrelated child's 529 plan?

You can contribute to 529 plans established for children who are not related to you. "Many of our clients, who are in their 30s and 40s and have no children, like to take advantage of this," said Eric Roberge, CFP and founder of Beyond Your Hammock.

Regardless of who owns the 529, you can make direct deposits to your account using your bank. That way, you don't have to turn the money over to another guardian and wait for them to deposit it into the plan. Most custodians, including renowned money management firms Vanguard and Fidelity, can provide specific instructions on how to contribute online or issue a gift certificate to accounts owned by third parties.

“Many plans have online gifting pages where the account owner can share account information with anyone who wants to contribute, so that people can donate money directly and, in many cases, claim the tax benefits available from their contributions, ”Ann Garcia, a CFP who works at Independent Progressive Advisors.

States that sponsor 529 plans set contribution limits, which generally range from $ 200,000 to more than $ 500,000. Some states do not set contribution limits.

Before contributing to a child's 529 plan, it is important to familiarize yourself with the contribution limits in the state where the plan was opened.

You can find information about the contribution limit on the relevant state-specific 529 plan websites, such as CollegeAdvantage in Ohio or NextGen 529 in Maine.

How will a child's 529 donation affect taxes?

You may be eligible for a state income tax deduction if you make a donation to a child's 529 plan. However, when it comes to federal taxes, no deductions are allowed. But before giving a gift to a 529, be sure to consider the following.

Gift tax

“If you go over the annual donation limit, you will need to count it on your tax return and pay taxes on the donations,” Roberge said. By 2020, an individual, in general, can give one person $ 15,000 per year, while a couple can give one person $ 30,000.

Superfinancing

Qualifying 529 tuition accounts come with a special contribution provision known as "superfunding." With this arrangement, you can contribute up to five years of giving in one year. According to the Internal Revenue Service (IRS), you can treat the contribution (for tax purposes) as if you had made it pro rata for five years. In other words, for each of the five years following (and including) the contribution, you would report one-fifth of the contribution as a gift on your taxes.

This means that if you're feeling extremely generous, you can donate up to $ 75,000 to an unrelated child's college fund, not counting the lifetime gift tax exclusion limit. Even if you are not subject to gift tax for that amount, you will have to wait six years to contribute more.

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