Family members often struggle to pick the right gift for the child that seems to have it all. Instead of standing in long lines to purchase the latest gadget that will be tossed aside by the new year, this time of year presents an opportunity to give the gift sure to last a lifetime: a college education.
Whether your child realizes it or not, this can be the gift that keeps on giving. First, it reduces the chances of him relying on student loans to finance his education. By reducing the need for student loans, you can play an important role in promoting your family member’s financial stability after graduation. And, you can help relieve some stress for the parent who may need help saving for their children’s education.
If financially contributing to a special child in your life’s education interests you, then you may want to consider either of these two options: contribute to a section 529 college plan or pay for the child’s education directly.
A section 529 college plan allows individuals to either prepay for college, or save for post-secondary education over time. Beneficiaries can use the money for college, vocational school, or graduate school as long as it satisfies the IRS requirements for an eligible educational institution.
While contributions to this account are not federally tax deductible, the earnings grow tax-deferred and distributions used to pay for qualified higher education expenses, like tuition and books, are tax free.
And, if it turns out that your child doesn’t need some or all of the money saved for his education, then you may be able to change the beneficiary to another family member.
This is a popular choice among parents because it allows family members, like grandparents and aunts, to contribute. Some 529s require an initial investment of only $250. After that, you can often make contributions of any size either on an ongoing basis, or for special occasions – such as birthdays and Christmas. As a result, saving for college becomes a joint effort among the people who care about your child the most.
The contribution limits for this plan are generous, as they allow families to contribute up to the amount necessary to cover qualified educational expenses for that beneficiary. Unlike other education savings options, there are no income limits for donors. Each family member can contribute up to $13,000 per year for as many beneficiaries as they want without incurring gift tax consequences. This assumes that the individual has not already gifted all or a portion of his gift tax exclusion for that child during the year.
And, donors can make five years worth of gifts ($65,000 for single tax filers, $130,000 for joint) at one time, as long as they abstain from making annual gifts in any of the next five years.
If your family member is already in college or vocational school, then here’s a different option to consider: pay their tuition directly. By paying the school directly for tuition, you can realize the same personal satisfaction of helping fund a college education, and avoid gift taxes. While some in-state public schools do not cost $13,000 per year, private or out-of-state tuition can easily exceed this amount. Therefore, it is imperative that you pay the school directly, not the child, in order to circumvent the $13,000 annual gift exclusion.
So, as you decide what gift will put the brightest smile on your child or grandchild’s face this year, consider ways to give the gift of a lifetime: an education.
Life is a journey, plan for it.
Ashleigh Brooker , CFP, is the principal of A.J. Brooker Financial Associates in Columbia. Reach her at info@AJBrooker.com or (803) 724-1235.