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Parents: Consider a 529 Savings Plan this Holiday Season

The signs of the season are everywhere.

Holiday music on the radio.
Decorations in every store.
529 plans swelling with contributions.

Wait, what was that last one?

It’s one of the busiest times of the year for parents. Many of us could be forgiven for not putting college savings at the top of our to-do lists. But taking a few moments to set up a 529 Savings Plan for college, which you can do for as little as $50, is worth considering this month, not only for the tax benefits you can enjoy next April.

It’s no secret the cost of college is rising fast and that, these days, more students than ever are graduating with lots (and lots) of debt. In fact, for the first time ever, student debt in the United States has surpassed $1 trillion. That’s more than all our consumer credit card debt put together.

Even if your family will qualify for financial aid, chances are you or your teenager will have to foot some of the bill. The fact is there are few “free rides” anymore, even for the most talented students.

For more than a decade, 529 savings plans have offered parents a tax-advantaged way to save for college. Specifically, these plans—which are named after a section of the IRS Code—allow your money to grow tax-deferred. This is similar to an IRA or 401K.

What’s more, when you use the money you save in a 529 savings plan for a “qualified” expense—college tuition, books, even room and board—you pay no federal taxes whatsoever on those withdrawals. These days, most every state and the District of Columbia sponsor 529 savings plans, and there are options for most every budget. Some plans require parents to make an upfront investment of a few thousand dollars or more. Others let you start with as little as $50.

Ways To Save For College: 529 Savings Plan

It’s worth noting that you do not need to sign up for your own state’s 529 plan—or send your teenager to a school in the state that sponsors your plan. In other words, if you live in Ohio and your teenager wants to go to college in California, you can still sign up for, say, Delaware’s 529 plan.

However, if your state’s 529 plan works for you, there may be a tax-advantage to using it. That’s because some states allow you to take a partial or full state income tax deduction on your contribution to the state’s 529 plan, if you are a resident of that state. Your contribution must be made by December 31st.

Need more food for thought? Unlike an IRA or 401K, anyone can contribute to your 529 plan. This makes it a great way for grandparents—or your crazy old rich uncle—to help pay for college.

In 2018, investors can contribute up to $15,000—or $30,000 for married couples—to a 529 plan without having to pay the federal “gift tax”. But the contribution must be made by the end of the month. Investors can also make a larger upfront contribution of $75,000 “gift-tax-free”—or $150,000 for married couples. This is provided they do not make another gift to that specific 529 plan for the next five years. Also, remember that these limits are per plan, so grandparents can do this for each of your children.

So as you rush around town looking for that perfect gift this season, why not also take a few minutes—and that’s about what it takes—to set up a 529 plan for your prospective college student. Just think of the cheer you’ll feel when that bill arrives from your teenager’s Dream U. several years from now.

This article has been updated as of Dec 13, 2018.