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If you have a grandchild, other relative or friend you'd like to give the gift of college savings to, you may wonder how to go about it. There are a few different options available, depending on what you're comfortable with and what the prospective student already has in place.
Before you simply write a check, consider the following options.
5 Ways You Can Give College Funds as a Gift
If you're thinking about helping a loved one save for college, it's generally best to ask them or their parents in advance to see whether they already have a plan or account in place. With that in mind, here are five potential options to consider.
1. Contribute to Their 529 Plan
If the prospective student has a 529 plan in place, anyone can make contributions directly to the account. A 529 plan can be especially beneficial because the balance grows on a tax-free basis, and can be withdrawn tax-free as long as the funds are used for qualified educational expenses, such as college tuition and room and board.
As a contributor, you may also qualify for a state income tax deduction or credit, depending on where you live.
Depending on the plan, you may be able to contribute by sending a check to the provider, using Gift of College gift cards or contributing online using a special portal. Ask the student or their parents who the plan provider is and check to see what your options are.
2. Open a 529 Plan
If you plan to make recurring contributions to your loved one's college savings but they don't already have a college savings plan in place, you can open one with them as a beneficiary. You can do this even if you're not related to the student.
By opening a plan on your own, you become the owner. This means that if the student ends up receiving scholarships or chooses not to attend college, you can withdraw the money yourself. Of course, you may be assessed a penalty and income taxes, depending on the situation, but it'll give you a bit more control over the money.
Each state has its own 529 plan offering, but you don't necessarily have to choose the one your state offers, especially if there are no state income tax benefits. Compare several plans and choose the one with the lowest fees and best investment options. The state that offers the plan doesn't need to match the state that you or the student resides in.
3. Contribute to or Open Another Educational Savings Account
While a 529 plan tends to be the best option for many college students, there are also Coverdell Education Savings Accounts (ESAs) and custodial accounts, such as a UGMA (Uniform Gifts to Minors Act) or a UTMA (Uniform Transfers to Minors Act).
Custodial accounts can be used for non-education purposes, which can give you a bit more flexibility if you're opening one on the student's behalf. But if there's already an account in place, it may be better to contribute to that one instead of opening a separate 529 plan or other account.
4. Send a Check
If you're not sure whether your future college student already has a plan in place and you don't want to complicate things, you may simply send the person or their parents a check to be cashed and contributed to their college savings account.
This option can be simple, especially if you want to help but aren't particularly close, or if you simply want to avoid unnecessary complexity in the process.
5. Purchase Savings Bonds
If you want to give college savings to a newborn, one option is to use Series EE Savings Bonds. These bonds are reliable, low-risk government bonds that are guaranteed to be worth twice what you paid for them in 20 years.
EE Savings Bonds can be purchased in $25 increments, and you can purchase up to $10,000 per Social Security number per year.
Are There Limits to What You Can Contribute?
Depending on the type of college savings account the student has, there may be annual contributions to keep in mind. Specifically, Coverdell ESAs only allow up to $2,000 in contributions annually for each beneficiary. If the student's parent has one in place, they may have already reached that.
In contrast, 529 plans and custodial accounts don't have annual contribution limits.
That said, you can only give up to $15,000 in 2021 and $16,000 in 2022 free of gift-tax consequences. There are ways to get around this annual limit, however. For example, if you and your spouse contribute to a loved one's 529 account, each of you can give up to the annual limit individually. There's also a special rule allowing you to spread a large one-time gift across five years' worth of gift taxes.
As you might assume, the gift tax is a bit complex, so if you're thinking about making a large contribution to a loved one's college savings, consult with a tax professional to get personalized advice.
The Bottom Line
Giving the gift of college savings can help a loved one reduce their reliance on student loans or even avoid them altogether. Before you do so, though, check to see what's already in place and see how you can add to it.
If your loved one hasn't yet established a college savings fund and you want to make regular contributions to a dedicated fund, you may consider opening an account on your own with the student as a beneficiary. Alternatively, you may consider simpler options such as just giving your loved one a check directly. The important thing is taking the time to review your opportunities to give young loved ones gifts that will pay dividends for years to come.