You might be looking for original Christmas gift suggestions for a child that isn’t connected to you. If you typically purchase toys and gadgets, you might want to think about giving something more important instead, such as making a contribution to a 529 qualifying tuition plan. The student (and their family) can better prepare for the high cost of private school or college by doing this.
Even though a young child may not first see the value of your gift, they will undoubtedly be grateful when it’s time for them to enroll in college.
So how do you fund a 529 plan for a child who is not related to you? Are there any tax repercussions from doing this? Next, we’ll go over the solutions to these queries.
How Do 529 Plans Work?
These state-sponsored, tax-advantaged savings accounts are created to assist families in setting aside money for school costs. There are two different kinds of 529 plans: education savings plans, which invest money so that it might grow over time, and prepaid tuition plans, which let you purchase credit for future tuition at today’s pricing. With contributions from parents and others that are made after taxes, education savings plans are more prevalent and operate similarly to Roth individual retirement accounts (IRAs).
When the money is utilized for a variety of “qualifying” college and private K-12 expenses, 529 plans, sometimes known legally as “qualified tuition plans,” offer considerable tax advantages. When made to 529 plans, contributions are invested and grow tax-free until used to pay for the beneficiary’s educational costs.
Tuition, books, room & board, and instructional supplies are examples of qualified expenses that can be covered through education savings accounts.
Can I Give to a 529 Plan for a Child Who Is Not Related?
You are permitted to make contributions to 529 plans created for children not connected to you. According to Eric Roberge, CFP and creator of Beyond Your Hammock, “many of our clients who are in their 30s and 40s and don’t have children of their own desire to take advantage of this.”
You will be able to put money directly from your bank account into the 529 account, whoever owns it. You won’t need to give money to a different guardian and then wait for them to put it into the plan if you do it this way. The majority of custodians, including well-known investment houses Vanguard and Fidelity, can provide you with detailed instructions on how to make an online contribution or write a gift check for an account that belongs to someone else.
According to Ann Garcia, a CFP who works at Independent Progressive Advisors, “Many plans have online gifting pages where the account owner can share the account information with anyone who wants to contribute, so that people can gift money directly and, in many cases, claim any available tax benefits for their contributions.”
The maximum contributions, which typically vary from $200,000 to more than $500,000, are set by the states that sponsor 529 programs. Some states don’t even impose contribution caps.
Learn about the contribution caps in the state where the 529 plan has been opened before making a contribution to a child’s account.
On pertinent state-specific 529 plan websites, such as CollegeAdvantage in Ohio or NextGen 529 in Maine, you can discover information about contribution limits.
How Do Taxes Impact Contributions to a Child’s 529 Plan?
If you make a gift to a child’s 529 plan, you might be able to deduct it from your state income taxes. Therefore, there is no deduction permitted for federal taxes. However be sure to take the following into account before you donate to a 529.
According to Roberge, “if you exceed the annual gifting cap, you’ll need to account for that on your tax return and pay gift taxes.” An individual may generally give one person gifts totaling $15,000 in tax year 2021, while a married couple may offer one person gifts totaling $30,000 in that same year. 2 The cap is raised to $16,000 for individuals and $32,000 for married couples in tax year 2022.
competent education “Superfunding” is a unique contribution option available for 529 accounts. You may contribute up to five years’ worth of gifts in a single year under this clause. You can consider the donation (for tax purposes) as if you had made it gradually over five years, according to the Internal Revenue Service (IRS). In other words, you would declare one-fifth of the amount as a gift on your taxes for each of the five years that follow (and include) the contribution.
This implies that, if you’re feeling especially kind, you can donate up to $75,000 to a college fund for a child who is not a sibling without it counting against your lifetime gift-tax exclusion cap. Even though you won’t owe gift tax on that sum, you’ll need to wait six years before making any contributions.
529 programs are intended to facilitate tax-efficient school savings.
Even if you are not related, you can make a contribution to a child’s 529 account.
Giving to a child’s 529 plan can help you reduce your state income taxes, but it typically has no impact on your federal taxes.
If you give more than the annual gifting cap, you must pay gift taxes unless you use the 529 plan superfunding mechanism.
You won’t be subject to gift taxes if you superfund a 529 plan with up to five years’ worth of gifts in a single year.