Looking for that perfect gift for your family's youngest members? Consider giving the gift of education with a 529 college savings plan. It's a flexible and convenient way to help them cover college costs that may also provide you with some financial benefits.
Here are six reasons why you might consider opening 529 plans for your loved ones:
1. Tax benefits
Assets in a 529 plan can grow tax-deferred. What's more, withdrawals are tax-free if the money is used for qualified education expenses.
2. Ease of changing beneficiaries
The account holder can change the beneficiary without penalty. If you open a 529 plan for your son but he decides not to go to college, you can transfer the money to another loved one or use it to further your own education.
But be sure to use the money for qualified education expenses: Otherwise withdrawals of investment earnings will trigger income tax and a 10 percent federal tax penalty.
Investors enjoy peace of mind knowing their money will be spent on education costs such as tuition and fees, textbooks and in some cases, room and board. "The money is really going toward the recipient's future in a way that deposits in a savings account can't," says Reyna Gobel, author of How Smart Parents Pay for School.
4. Choice of investments
You can invest 529 plan assets in age-based portfolios or a selection of mutual funds, which gives you more control than many other savings vehicles.
5. Estate benefits
Account holders can give substantial assets without gift- or estate-tax repercussions. Ordinarily, gifts of more than $13,000 within one year ($26,000 per married couple) reduce the giver's lifetime gift- and estate-tax exemptions. But special rules for 529 plans allow five times that amount at once: An individual can give up to $65,000, and a couple up to $130,000, to each beneficiary in a single year without triggering any gift- or estate-tax liability.
This provides a tax-efficient way to transfer wealth during your lifetime. But be aware that additional gifts to the beneficiary in the following five years, including contributions to the 529 plan, will eat into your gift- and estate-tax exemptions.
6. Financial responsibility
Contributing to a 529 plan provides you an opportunity to teach the next generation about saving and investing. "These lessons stick with you if you learn them at a young age," says Gobel. To interest younger children, Gobel suggests printing your contribution and giving it with a small toy.