Grandparents giving gift of college via 529s

With a flock of grandchildren and great-grandchildren, Pam Hendrickson and husband Ed Kent need a way to make gift-giving easier at Christmas and on birthdays.

Their solution: contributions to 529 plans — 11 in all — to help cover the kids’ future college costs.

“I absolutely love the program,” said Hendrickson, of Salt Lake City. “It’s been such a lifesaver.”

For many years, account holders in state-sponsored 529 college savings plans, such as the one offered in Utah, were almost exclusively parents. But increasingly, and especially around the holidays, grandparents are opening these accounts to help cover rising college costs.

In addition to holiday gifts, the year-end is also a time when more affluent grandparents take advantage of federal gift tax rules to make college savings plan contributions. Federal gift tax rules allow up to $14,000 per individual to qualify for this annual exclusion.

In 529 accounts, contributions are not deductible but earnings grow tax-free. In addition, those earnings can be withdrawn without a tax hit as long as the funds are used to cover qualified college expenses, such as tuition, room and board, and certain other fees.

There’s another tax advantage to 529s: Thirty-four states provide a state income tax deduction or credit for contributions, but mostly if contributions are made to their home-state 529 plan. However, five states — Kansas, Missouri, Montana, Arizona and Pennsylvania — allow the deduction for contributions to any state’s plan, the savings foundation said.

While gifting through a 529 account has many advantages, financial planners caution that this generosity can sometimes affect the amount of financial aid your grandchild is eligible to receive from the federal government and the school. The impact varies depending on how the accounts are created, and on the timing of contributions from a grandparent-owned account to the student.

Hendrickson and Kent, both of whom worked in the tax field before retiring, have been contributing to Utah’s Educational Savings Plan for their blended family since the early 2000s.

“We’re on it as soon as (the kids) gets a Social Security number,” Hendrickson said.

One grandson, who recently graduated, used the 529 funds to cover housing costs for all four years, and still has funds available to tap for education; another grandson uses his money for textbooks.

The Utah couple maintains control over the 529, which adds another benefit: If any funds are left over from one child’s account, they can be transferred to another.

The grandparents make monthly contributions of $20 to each account. At Christmas and on birthdays, they provide the kids with a certificate or copy of their college savings statement. For the holiday, the statement comes with something to unwrap — a Christmas book for the younger kids, and gift cards for the older children.

Kent said giving the gift of college is gratifying because “we’re in a position to help them with their goals ... it also gives us a chance to talk about the importance of education.”

Helene Hovanec, a grandmother from Brooklyn, N.Y., calls her 529 contributions “forever gifts.”

“I think a lot of grandparents would rather buy stuff,” said Hovanec, a puzzle editor. “But if you really want to leave a lasting legacy, this is a way to do it.”

Shortly after her granddaughter was born about four years ago, Hovanec began making contributions to the child’s 529 plan in Pennsylvania. Hovanec also includes a book or small gift.

Hovanec said she plans to start using a 529 online gift registry through the GiftofCollege.com. The program allows family and friends to contribute directly into an existing or newly started 529 account.