Holiday season is one of the most popular times of the year for opening 529 plans — the tax deferred accounts that help parents save and for qualifying higher education expenses.
Sometimes parents set up the accounts and invite relatives to make contributions during holidays and birthdays. Sometimes relatives or friends open the account and contribute on behalf of a beneficiary.
Here are a few tips from Harvey Snider, wealth management advisor for Merrill Lynch in Duluth on 529 gifting:
Start early. Starting when a child is young allows you to give appropriate consideration to the level of risk involved and to make sure you continually monitor and adjust the account as the child or children continue to grow, says Snider.
“When a child is younger the opportunity to assume a slightly higher level of risk in the hopes of a larger return is more appropriate than perhaps a year or two or three away from when the child needs to begin withdrawals,” Snider says.
Avoid issues of control. Give serious thought to who will establish the account. You want to avoid any control issues and those can vary greatly from one family to another. Typically, a parent or grandparent is the best originator of the plan so there can be excellent communication, Snider says.
Know how the account will grow and who benefits from it. Determine if the account will be established with a single large contribution or grow over time through smaller contributions. Also decide if one account will serve multiple children in the family. These decisions will dictate how to best manage the plan, so proper consideration must be given at the start, Snider says.
Comparison shop. Look across all the state sponsored plans to find the one that best suits your situation. Decide if it would be best to set up the plan in the state of the gifter or the beneficiary. Weigh the advantages, disadvantages and cost differences, Snider says. There may be certain taxes for out of state plans and different investment options available from state to state. Seek input and guidance from a qualified financial professional on which plans may best fit your circumstances.
Georgia’s Path to College 529 Plan can be opened online with as little as $25 and carries a low annual asset based management fee, according to plan director Mitch Seabaugh. Georgia offers a state income tax deduction on contributions of up to $2,000 per year, per beneficiary and the plan has seven investment options. You can learn more by visiting the website or calling 1-877-424-4377.
Be creative when asking for donations. If you are a parent setting up an account for your child and want to politely ask relatives to contribute, Snider suggests using a little creativity. “I think in this age of social media, mom or dad might share a picture of the child with a t-shirt, sweatshirt or cheerleading outfit from a collegiate institution and say, ‘Little Harvey has a birthday coming soon, contributions to my college fund can be sent to this address. Please see mom or dad with account information as I don’t want to share that information electronically.’”
Do you have a 529 plan for your child/children? Why or why not?
– Nedra Rhone, for the Atlanta Bargain Hunter blog