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Can You Give Directly to an Unrelated Child's 529 Plan?

Do you have to be related to the benefactor to give?

During the holiday season, you may be in need of inventive gift ideas for a youngster who’s unrelated to you. If you’re accustomed to purchasing toys and electronics, you may instead want to consider a more meaningful present, like contributing to a 529 qualifying tuition plan. Doing so may assist the youngster (and their family) prepare for the high expense of private school or college.

While a young kid may not recognize the advantage of your present immediately, they’re sure to thank you when it comes time for them to attend college.

So how do you go about contributing to an unrelated child’s 529 plan? And are there tax ramifications of doing so? We’ll go through the answers to these questions below.

What Are 529 Plans?

These plans are state-sponsored, tax-advantaged savings accounts meant to help families pay for school expenditures. There are two sorts of 529 plans: prepaid tuition plans, which enable you to purchase credit for future tuition at today’s pricing; and education savings plans, which entail investing money so that it might increase over time. Education savings plans tend to be increasingly widespread and act a lot like Roth individual retirement accounts (IRAs), with after-tax contributions from parents and others.

Legally designated as "qualified tuition plans," 529 plans provide considerable tax advantages when the funds are utilized for a range of “qualified” college and private K-12 expenditures. Contributions to 529 plans are invested and grow tax-free until they are required to fund the beneficiary’s school expenditures.
Note
Qualified expenditures that may be covered using school savings plans may include tuition, books, room and board, and classroom supplies.

Can I Contribute to an Unrelated Child’s 529 Plan?

You may contribute to 529 plans that are set up for children who are not connected to you. “Many of our clients who are in their 30s and 40s and don’t have children of their own like to take advantage of this,” Eric Roberge, CFP and creator of Beyond Your Hammock, wrote in an email to The Balance.

Regardless of who owns the 529, you’ll be able to make direct transfers into the account from your bank. This way, you won’t have to pass over funds to another guardian and hope they deposit it into the plan. Most custodians, including well-known money-management companies Vanguard and Fidelity, may provide you precise instructions on how to donate online or fill out a gift check for accounts controlled by others.

“Many plans have online gifting pages where the account owner can share the account information with anyone who wants to contribute, so that people can gift money directly and in many cases, claim any available tax benefits for their contributions,” said Ann Garcia, a CFP who works at Independent Progressive Advisors, in an email to The Balance.

The states that sponsor 529 plans establish the contribution limitations, which normally vary from $200,000 to more than $500,000. Some states don’t impose donation limitations at all.
Note
Before you contribute to a child’s 529 plan, it’s crucial to acquaint yourself with the contribution restrictions in the state the plan has been opened in.
You may obtain contribution limit information on relevant state-specific 529 plan websites like CollegeAdvantage in Ohio or NextGen 529 in Maine.

How Will Giving to a Child’s 529 Plan Affect Taxes?

You may be eligible for a state income tax deduction if you donate to a child’s 529 plan. When it comes to federal taxes, however, there is no deduction available. But before you make a donation to a 529, be careful to examine the following.

Gift Tax

“If you go over the annual gifting limit, you’ll need to account for that on your tax return and pay gift taxes,” said Roberge. In tax year 2021, an individual, in general, may offer gifts to one person of $15,000 for the year, whereas a married couple can give one person $30,000.2 In tax year 2022, the cap rises to $16,000 from an individual or $32,000 from a married couple.

Superfunding

Qualified tuition 529 accounts come with a particular contribution provision known as “superfunding.” With this provision, you may donate up to five years of donations in one year. According to the Internal Revenue Service (IRS), you may regard the contribution (for tax reasons) as if you had made it ratably over five years. In other words, for each of the five years after (and inclusive of) the donation, you would declare on your taxes one-fifth of the amount as a gift.

This implies that if you’re feeling especially generous, you may contribute up to $75,000 to an unrelated child’s college fund without putting it against your lifetime gift-tax-exclusion limit. Even though you won’t be liable to gift tax for that amount, you’ll have to wait six years to donate more.

Key Takeaways
529 programs meant to help save for college expenditures in a tax-friendly manner.
You may contribute to a child’s 529 plan, even if you’re not connected.

While donating to a child’s 529 plan may help you save on state income taxes, it doesn’t normally effect federal taxes.

If you go over the yearly giving limit, you’ll be on the hook for paying gift taxes unless you take use of the 529 plan superfunding method.

In the event that you superfund a 529 plan and donate up to five years of donations in a single year, you’ll be free from gift taxes.

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