My kids have the glorious problem of too much stuff. They have half-finished Lego projects in every room but the kitchen. They have laptops, tablets, cell phones, board games, marble mazes, cameras- anything they could want they have (even if they might disagree). So what do you give them?
There is tremendous pressure to give stuff; for children to have something to open on the big day. But how much of that is the kids, and how much of it is us putting our expectations on them?
“But I Have To Give Them Something”
In 2015, UpTV in collaboration with the Metro Atlanta Boys & Girls Club gave kids 6 – 11 a choice: They could keep their dream gift or a present for their parent(s). Both gifts were placed on the table in front of them. Every single child picked the present for their parents.
This is consistent with larger trends and studies that have found younger generations value experiences over material possessions. Kids don’t need fancy gifts, they need something that means something and adds real value to their lives. Now more than ever families need help with saving for college because the education landscape is likely to change in the wake of COVID, and it’s impossible to say what higher education will look like in the future.
Finances are tight for most Americans right now, but for those that are able to give you could change someone’s life for the better.
To many Americans the 529 plan has become the default vehicle for higher education investing. The plans off potential tax, estate, control, financial aid, and addition benefits depending on your state of residence. They are also one of the best options for gifting money for purposes of a higher education. You can gift via 529 plans in one of three ways:
- Open an account for them – Opening your own 529 account gives you total control of the assets for the beneficiary, whether it’s your child, grandchild, or just someone important to you. You control the investments, if and when withdrawals are made, and the flexibility to make changes if needed.
- Contribute to an existing account – If you want to contribute to, say, your niece’s 529 account rather than having to open one yourself, you can gift to the existing account. Anyone can contribute to a 529 plan: Relatives, friends, colleagues- anyone. Plus, every 529 savings plan and most prepaid plans offer an electronic gifting solution. This usually means a code attached to an account: Visit the landing page, input the code, make a gift via credit card or EFT. If you have a 529 account or know someone who does the account owner can visit the site of or contact the plan provider for gifting options.
- Buy a gift card – If you or a loved one do not already have a 529 plan and you don’t want to open one yourself, you can encourage a family member to do so with a gift card from Giftofcollege.com. It also allows you to give something tangible. For a fee you can order a card online or you can purchase a card in one of its participating stores like Cumberland Farms or Target
While 529 plans are excellent vehicles for gifting towards a higher education it is important to note that these are state-sponsored municipal securities. You can open an account with out-of-state plans where you may have access to lower fees or better investments. However, some states offer benefits only to residents who participate in the in-state plan, such as tax benefits or preferred financial aid treatment when considered towards in-state colleges. Be sure to check out your home state first before considering an out-of-state plan.
Other Ways To Gift A Higher Education
While a 529 plan is typically a great vehicle for college gifting, it’s not always the best option. There are lots of ways to help loved ones save for a higher education, and the best option for you depends on your financial situation.
Use another tax-advantaged vehicle such as a Coverdell ESA, custodial accounts, or series EE or I U.S. Savings Bonds. While none of these accounts are as easy to gift into as a 529 plan, each has certain unique benefits – and restrictions – that may be more useful to you depending on your personal financial situation. For example:
- Coverdell ESAs have a wider range of investment options than 529 plans and similar tax-deferred and financial aid benefits. However, you can only contribute to a Coverdell if you earn less than $100,000 in MAGI if filing singly or $220,000 if married filing jointly. Also, there is an annual contribution limit of $2,000 per beneficiary contributed across all accounts in any given year across all Coverdell ESA accounts in their name. This means you have to be careful not to contribute to the same beneficiary as someone else or risk incurring tax penalties.
- The UGMA (Uniform Gift to Minors Act) and UTMA (Uniform Transfer to Minors Act) are custodial designations that can be applied to a variety of accounts. Think of them like an inexpensive irrevocable trust. You can open an UGMA/UTMA brokerage or 529 account, for example. As an UGMA/UTMA the account receives a small exemption from taxation. These accounts are subject to the Kiddie Tax. The first $1,100 of unearned income is tax-free, while the next $1,100 is taxed at the child’s bracket. Unfortunately, additional earnings are now taxed at trust tax rates, making them less desirable for larger accounts. The accounts also turn over to the beneficiary automatically at age 30. Still, having an UGMA/UTMA account can help ensure assets are used for the beneficiary, such as in a divorce.
- You could open a custodial Roth IRA for your beneficiary. This has the twofold benefit of starting your beneficiary on the road to a successful retirement and putting them in a better position for funding other expenses along the way. However, the beneficiary must have earned income in order for you to deposit funds into a custodial Roth IRA. This means if you have a 15 year old bagging groceries and he reported $1,000 in income that the most you could gift into the account is $1,000. Withdrawals from retirement accounts like a Roth IRA can also have a significant impact on their financial aid eligibility, so use caution.
- Qualifying U.S. Savings Bonds include the Series EE and Series I bonds, when redeemed under the right conditions, have the interest excluded from income. Those conditions can be difficult to meet, however, and the returns are generally low, historically speaking. For more information on the exclusion, see IRS Form 8815.
Paying tuition directly to the higher education institution avoids the gift tax entirely, but only when used for tuition. This means room and board, fees, dues, computers, etc. do not qualify. This can also have a substantial impact on the ability of the student to qualify for financial aid in future years.
Cash. Everyone appreciates cash, because it gives you the most versatility, and it’s relatively safe. However, gifting cash to a loved one can have big drawbacks: Some obvious, some not. First, you have no control over how the recipient spends that money, be it for college or a new car. Second, cash starts losing value as soon as you gift it due to inflation. Finally, there is the opportunity cost of keeping that gift in cash rather than the appreciation potential of another savings vehicle. This could be the growth potential from investing, state tax benefits, grants, matching gifts; consider carefully the road not taken before handing over cash.
If you are lucky enough to be in a position where you are trying to transfer wealth while minimizing taxes, you’re in luck when it comes to college savings. There is a lifetime exclusion for gifting per recipient of $11.58 million, but an annual exclusion of $15,000. As a result, if you give over $15,000 in a single year you typically eat into your lifetime exclusion for that recipient. However, 529 plans have a special treatment where you can “forward fund” up to five years worth of the annual gift exemption, meaning you could put $75,000 into a 529 account right now without eating into that lifetime exclusion amount. If you have a lot of grandchildren, for example, superfunding can become a powerful estate planning strategy. There are special rules associated with superfunding a 529 plan, so be sure to consult a qualified tax professional if this is something you are considering.
Brian Boswell is a registered representative of and offers securities through MML Investors Services, LLC. Member SIPC. www.sipc.org, 101 Federal St, Suite 800, Boston, MA 02110. Tel: 617-439-4389. CRN202211-274205.