Give the Gift of a 529 Plan Contribution
Grandparents may be able to get a tax deduction if they help fund their grandchild's college-savings account.
If grandparents make contributions to their grandchildren's 529 plans -- which are owned by the parents -- do they still get the state income-tax deduction if offered by their state? Also, do they have to reside in the same state?
This is the perfect time of year to think about making 529 contributions as holiday gifts for your grandchildren. And it’s also a good idea to consider the tax benefits you could receive.
The rules vary by state. Most states require you to contribute to your home-state’s 529 plan in order to get an income-tax deduction for your contributions. In that case, you can only deduct your contributions to the parents’ 529 if they set up the account in your state. (Five states -- Arizona, Kansas, Maine, Missouri and Pennsylvania -- allow a deduction for contributions made to any state’s plan.)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
States have different rules about who can qualify for the tax break. Some states, such as New York, let you take a tax deduction for your contributions only if you are the owner of the account. But other states, such as Connecticut and Kansas, allow nonowners to take the deduction, says Joe Hurley, of Savingforcollege.com. And in Virginia, the account owner can claim a deduction for contributions made by nonowners, says Hurley.
But even if you aren’t eligible to deduct your contributions to an existing account owned by someone else, you may be able to get a tax deduction by opening a new account for your grandchild. There’s no limit to the number of accounts that can name the child as a beneficiary. If you live in a different state than the child’s parents, for example, you could open an account in your own state and make tax-deductible contributions to that account, even if the parents already have an account for your grandchild in another state. Or you could open a separate account in your state if the tax deduction is only available to account owners, even if the grandchild is the beneficiary of another account in your state.
Check out the rules for the tax deduction and the size of the deduction permitted in your state at www.savingforcollege.com -- click on “compare plans” and focus on the tax section. Also review the deadlines for making tax-deductible contributions -- most states require you to make contributions before December 31 to qualify for a tax break for that calendar year, but a few states (such as Georgia) give you until the tax-filing deadline (April 18 in 2011) to qualify for a 2010 tax break.
For more information about Kiplinger’s favorite 529 plans, see Find the Best 529 Plans.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.
-
Voters Approve New Veteran Property Tax Relief
Tax Relief Thanks to the election, some Veterans will soon see expanded property tax exemptions.
By Kate Schubel Last updated
-
Should You Trust Robo-Advisers With Your Retirement?
Why use a financial adviser when you can get retirement planning tools online? The simple answer: Tech can't yet replace nuanced advice from a professional.
By Scott Noble, CPA/PFS Published
-
529 Plans: A Powerful Way to Tackle Rising Education Costs
Contributions to 529 plans grow tax-free and are not taxed when they are used to pay for qualified educational expenses for the beneficiary.
By Denise McClain, JD, CPA Published
-
Tax Tips for Transferring Excess 529 Plan Funds to Roth IRAs: The Tax Letter
The Tax Letter 529 plans can help blunt the cost of paying for college. But if you want to use leftover funds there are some tax tips to bear in mind.
By Joy Taylor Published
-
529s: No Longer the Ho-Hum Investing Device for College
Changes to the plans allow for the savings to be rolled into a Roth IRA, as long as certain rules are met, if a child decides not to pursue their education.
By Neale Godfrey, Financial Literacy Expert Published
-
529 Plans: Give the Gift of Education (and Compounding)
As the cost of college tuition skyrockets, parents and grandparents can take advantage of tax-efficient 529 plans and higher limits on gift and estate taxes.
By Mel Casey, CFA®, CAIA Published
-
Have Leftover 529 Funds? Expert Strategies for Unused Balances
Excess 529 funds represent both a challenge and an opportunity, and knowing your options is essential.
By Marguerita Cheng Published
-
Using a 529 Plan? Here’s What to Keep in Mind
As the school year progresses, ensure you’re using the money for qualified expenses and keeping track of documentation. Taxes and options for unused funds are also considerations.
By Julie Virta, CFP®, CFA, CTFA Published
-
Three Reasons You Need to Use a 529 Plan (and Two Reasons You Don't)
Tax benefits and a Roth IRA feature make 529 college savings plans attractive, but they're not a one-size-fits-all option.
By Shane W. Cummings, CFP®, AIF® Last updated
-
529 Plans Get a Boost With Tax-Free Rollovers to Roth IRAs
Thanks to the SECURE 2.0 Act, you're now able to roll over funds from your 529 into a Roth IRA, as long as certain conditions are met.
By Erin Bendig Last updated