Global Family Law Services

Consider making 529 Plan gift to graduate

| May 20, 2022 | 529 plan, education savings plan

It’s May which means millions of students will be graduating from high school and college this month. If you have been considering a gift for a high school graduate or a college grad bound for graduate college, you have most likely thought about gifting the conventional cash or check. However, in lieu of cash, you may want to consider contributing to a 529 plan or paying for a consultation with a financial adviser.

A 529 plan is an education investment account that allows an account holder to place after-tax contributions in an account that can be withdrawn in the future for a beneficiary’s educational expenses including tuition, room and board. Money held in a 529 plan can be used for elementary and secondary school tuition along with college and graduate school expenses. The earnings that come from investing in a 529 plan cannot be taxed so long as funds withdrawn from the plan are used to cover qualified expenses (i.e. tuition, books, computers, room and board, etc.).

Anyone can contribute to the 529 plan and most plans make it extremely easy for individuals to do so. For instance, many plans prominently display links for donating to students’ accounts on their internet home pages. By making a gift to the 529 plan, not only do you assist the recipient, but you can also receive a tax benefit. 529 Gift contributions are deductible from your Ohio taxable income. Contributions up to $4,000 per year, per beneficiary (made payable to the Ohio Tuition Trust Authority) can be deducted. Further, contributions over $4,000 can be carried forward to future tax years until fully deducted.

But what if your college graduate will not be going on to graduate school – does it make sense to contribute to their 529 plan? The answer may still be yes. The 2020 Further Consolidated Appropriations Act 2020 allows account owners and beneficiaries to withdraw 529 funds to pay on qualified education loan payments. The loan repayment provision applies to repayments up to $10,000 per beneficiary. The $10,000 is a lifetime amount, not an annual limit. The good news is an additional $10,000 can be used to repay student loans held by each of the beneficiary’s siblings. Before gifting to a 529 plan, it is best practice to consult with a financial adviser and the account holder in advance since there can be significant financial consequences associated with all involved.

If a 529 contribution is not the right option for you or your graduate, you may want to consider paying for your graduate’s consultation with a financial advisor. According to a recent survey performed by Real Estate Witch, a significant amount of college graduates expect to earn a starting salary of over $100,000 upon graduation. The reality is that the average college graduate makes approximately $55,000 their first year out of school. Therefore, a college graduate who is entering the workforce may be about to make more money than they ever have in the past, but not have a clear understanding of how far a dollar stretches. This can sometimes result in the graduate making poor financial decisions. In an effort to assist your graduate from falling into this trap, you may want to provide the gift of sound financial advice by linking your graduate up with a financial adviser. While not glamorous, such a gift can have a positive effect on the graduate for many years to come.

This article originally appeared as a column for the Cleveland Jewish News.