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529 Plan Under the Christmas Tree

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One of the best things about growing up in the Chinese culture is the tradition of receiving 'red envelopes' with cash from all the adults in the family every Chinese New Year. Perhaps that tradition spilled over to our family Christmas gatherings. There was no anticipation of opening up piles of wrapped gifts under the tree. My parents, aunts and uncles would give us all cash placed in 'white envelopes' around the Christmas tree. Needless to say, there wasn’t much of a surprise factor when it came time for us to open presents!

However, now that we are much older and have a new generation of babies in my family, I can see the benefits of giving cash gifts, though with slightly more creativity. It’s easy to buy Christmas gifts for babies and young kids in the family – who wouldn’t want to pick out adorable outfits and fun toys for them to play with? But before you go all out every year and shower your nephews, nieces and grandchildren with presents, consider the possibility of splitting your gift budget between a small wrapped gift (so they still have something to open from you!) and a contribution to a 529 plan set up for them for college education.

There are several benefits to setting up a 529 plan for a close family member’s child.

  • College is expensive and will likely get more expensive in the years to come. By systematically contributing to a 529 plan for the child, you are helping the parents of the child pay for college and potentially reducing the amount of school loans that the child will have to pay back upon graduation.

  • Investments in the 529 plan grow tax free and as long as the funds are used to pay for qualified education costs, all withdrawals from the plan are tax free as well.
  • If you live in a state that allows you to deduct your 529 plan contributions from income on your state tax return, that’s an extra bonus. For example, in New York, each taxpayer can deduct up to $5,000 of 529 plan contributions per year against their income. Sadly, this tax benefit does not exist in New Jersey, as Governor Christie vetoed the bill earlier this year.

  • One final benefit, and one that can really make a difference to family members who may qualify for financial aid, is that 529 plans set up by any adult other than the child’s parents are not considered the parents’ assets in the formula used to calculate federal financial aid eligibility. While that could change in the future, at least for now, your child’s aunts, uncles, and grandparents can all set up 529 plans for his or her benefit. They can even consider coordinating the gifts so that all the contributions go to one account set up for the child. When the time comes to apply for financial aid, none of these 529 plans will be factored into your family assets, and therefore will not reduce your eligibility for federal financial aid. And yet, you will still have some extra ‘cash’ to help pay for your child’s college expenses.

Like with most things in this world, you don’t quite see the benefit of these 529 plans until 10, 15 or even 20 years down the road. But if you stick to the contributions each year for the long haul, the amount accumulated does add up and could make a difference for the family when the time comes to write those huge checks. The children may not get as many toys or gadgets during Christmas, but they will thank you when they graduate with less debt in their name!