Give the Gift of College — Contribute to a 529 College Savings Account

It’s graduation season and as surely as the backyard grills come out of hiding, caps and gowns will dot the landscape. And graduations mean gifts. Recently a friend, whose daughter graduates from high school this year, suggested her family consider gifts to her daughter’s 529 college savings account. It’s an excellent idea and while iPods and computers make great gifts, contributions to a 529 account are an investment in a child’s future.

A 529 is a state-sponsored college savings investment account and all 50 states offer them. They are often managed by a third-party for the state — mutual fund companies, stock brokers, insurance companies — and a variety of investment options are usually offered. For the most part, investing in a 529 plan is similar to investing in a mutual fund.

Many experts believe a 529 account is one of the best ways to save for college; it offers many benefits and lots of flexibility. Any earnings in the account grow tax free and, when the money is used to pay for qualified college expenses of the beneficiary, it is spent tax free (at least through 2010).* Appropriate expenses include tuition, room and board, books, supplies and equipment. Non-qualified distributions of earnings are subject to income tax and a 10% federal penalty tax.

In Wisconsin, anyone can contribute to a child’s 529 account, so if your student already has one in his or her name, your job is easy. You just have to work through the account holder — most likely the child’s parent.

In Wisconsin, once an account is opened, the minimum contribution is $25 and there is no annual maximum investment. If you make a contribution of more than $11,000 though, you may incur gift taxes. You may also be able to deduct some or all of your 529 contribution on your Wisconsin income taxes, so be sure to check.

529 Accounts as Gifts
If you’re considering a sizable contribution and want to retain control over the money, consider opening your own 529 and naming the student in your life as the beneficiary. That way you decide how the money is spent even when the child enrolls in college. There can be more than one 529 account opened for the same beneficiary so don’t worry if the child already has another 529 account.

If you’re thinking of opening a 529 account as a graduation gift, current or future, here are a few things to keep in mind:

You need not live in a state to open a 529 account in that state. Some states offer much better programs than others and you’ll want to do some research to find which program best fits your needs.

Check out your own state plan, as many states offer some sort of tax incentive for in-state investing. This additional tax break may provide an advantage for your own state’s plan.

Each state’s rules may differ slightly, so not every tip here will apply to every state’s 529 plan.

529 accounts can be opened on behalf of a person of any age, so you can start saving for that new baby now. Or you can open one for your 50-something cousin who’s going back to school.

You can easily change beneficiaries. If your nephew Joe decides not to go to college you can change the beneficiary to anyone who is a member of the current beneficiary’s family, as defined (pretty broadly) by law.

The money in a 529 account can be used at any accredited college or university in the country, and even at some foreign institutions.

The existence of a 529 account can affect a child’s financial aid, but it’s generally treated as an asset of the parent or account holder, so the impact is smaller.

If you end up never using the money for college for anyone, you will incur some steep tax penalties.

Ultimately, you need to know your own goals and do some research to find the best option for you. The gift of a 529 account could be the best investment you ever make.

*Under a “sunset provision,” these changes are scheduled to expire on December 31, 2010 in the absence of re-enactment. As with all tax-related decisions, please consult your tax advisor.

INVEST Financial Corporation (INVEST), member FINRA, SIPC, a registered broker dealer and registered investment adviser, is not affiliated with Johnson Bank, Johnson Investment Services or Johnson Financial Group.

Securities, advisory services and insurance products are offered through INVEST and its affiliated insurance agencies and are:
- not insured by the FDIC or NCUA - not a deposit or other obligation of, or guaranteed by any bank or credit union - subject to risks including the possible loss of principal amount invested.

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