Give The Gift Of Education This Year

It’s hard to believe that we’re beginning to see signs of the holidays rapidly approaching. With this also comes plentiful advertising for Black Friday and Cyber Monday.  In a day and age of Marie Kondo and greater awareness around spending time and money on experiences and purchases in alignment with your value system, I’d suggest considering putting a 529 contribution on the list of gifts for this holiday season.

What is a 529 Account?

A 529 plan is a tax advantaged account to be used for educational purposes.  529 Plans came onto the scene in 1996  are named after Section 529 of the Internal Revenue Code. Similar to a Roth IRA, the earnings in a 529 plan grow tax deferred and distributions are free of federal and state income taxes if used for qualified higher education expenses.  In 2015 the definition of higher education expenses was expanded to include computers and in 2017 to include up to $10K annually in K-12 tuition. While withdrawals for K-12 tuition are Federally tax free, California does not currently conform so a 10% penalty and tax is owed on the growth component for K-12 distributions up to $10K.

To Whom Can I Give The Gift Of Education?

While traditionally folks think about funding 529 plans for their children, this can also be a great gift for grandchildren, nieces and nephews, and godchildren.  As part of my own value system, I have made a commitment to giving gifts of experiences or education, so I’ve started to give the gift of a 529 plan at baby showers for the benefit of friend’s children.  In a sea of gifts, this can stand out and will be with the child over many years.  It’s also one where you can incorporate as an annual tradition, providing additional funding in future years on key dates like birthdays or each holiday season.

Open A New Account or Contribute to An Existing Account?

Shortly after clients have children, I often get the question “my parents or in-laws would like to help in starting a 529 account.  Should they open a separate account, or contribute to a 529 account that we open for our child?”.  The answer is, it depends!

There can be ease in maintaining just one account where all contributions are aggregated.  However, of note for FAFSA financial aid purposes, assets in a 529 with parents as the owners do need to be listed as an asset of the parents and disclosed on the FAFSA form.  Any 529 distributions from plans (with grandparent or other owners) for the benefit of the student are considered 50% income in calculating financial aid qualification (example: grandparent owns the 529, initial balances won’t be included for financial aid purposes, once distributions start as early as Freshman year, 50% of distribution will be considered as child’s income for calculating financial aid in subsequent years.  If the balance is only used Senior year, this may not come into play at all IF there was any eligibility for student aid during school – keep in mind this is needs based student aid).

If there are multiple 529 accounts for the benefit of one child (example: 1 account with parents as owners and 1 account with godparent as owner), many of the 529 plans do allow for multiple accounts to be combined using an “internal transfer” process as long as the beneficiary is the same.  Check with the specific state plan provider for additional guidance.

What State Plan is The Best?

Find the plan that’s right for you – saving for college is a fantastic resource for comparing different state plans side-by-side  Some states do offer a tax deduction for contributions to your own state plan, though California does not offer a deduction for contributions to a California plan so understanding which state plan(s) fit the criteria you’re looking for is important. Some of the criteria to consider: does your state offer a tax deduction, solid investment fund options, low cost funds, low cost plan fees, higher overall maximum lifetime contribution limits.

Note, if grandparents or family members making the contribution live in a state that offers a state income tax deduction, some states will offer the deduction regardless of which plan they contribute to and do not need to be the account owner to receive the deduction.  Consult a CPA for further clarification based on your specific circumstances.

How Much Should I Fund – It’s Not An All or Nothing Gift

While 529 accounts do offer a special provision enabling you to forward gift 5 years of the annual $15K gift allowance (5 years x $15K = $75K per giftor or $150K from a set of grandparents or godparents), you can start with as little as $50 or $100. With the high cost of education today, each dollar counts. The initial opening and funding of the account can often be just the start.

How Do You Invest The Funds?

These types of education savings accounts offer both static investment options as well as age based. Static is where you pick a fund, or a mix of funds, and then the dollars stay in that particular investment over the full duration of the account unless you make a change.  The benefit is you can build your own asset allocation.  The downside is if you start with a heavy stock allocation when the child is young, unless you make a change, the investment selection may be more aggressive than desired as the child approaches college age. Age based options for 529 accounts are similar to Target Based funds in company retirement plans.  The allocation is based on the child’s age, starting more aggressive when young and automatically adjusting to be more conservative as the child nears college age.  Under Federal regulation 529, plans only allow up to 2 investment changes per calendar year (including “rebalancing”). Using an age based option can be compelling if you’re not actively monitoring the account throughout the year.

What if Something Changes Down The Road?

Circumstances do change, and down the road if the beneficiary ends up not going to college or doesn’t use the funds, the owner of the plan can change the beneficiary.  A new beneficiary can be named, provided they are directly related to the original beneficiary (parents, stepparents, siblings, step-siblings, in-laws, children, step-children, and first cousins), or you can leave the assets invested in the plan for later use.

Giving the gift of education this holiday season may be just the start for someone special in your life!


Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future  performance of any specific investment, investment strategy, or product (including  the  investments  and/or  investment  strategies  recommended  or  undertaken by Private Ocean,  LLC [“Private  Ocean”]),  or any  non-investment  related  content,  made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated  historical  performance  level(s),  be  suitable  for  your  portfolio  or  individual situation,  or  prove  successful.  Due  to various  factors,  including  changing  market conditions  and/or  applicable  laws,  the  content  may  no  longer  be  reflective  of  current opinions  or  positions.   Moreover,  you  should  not  assume  that  any  discussion  or information  contained  in  this  blog  serves  as  the  receipt  of,  or  as  a  substitute  for, personalized investment advice from Private Ocean.  Please remember that if you are a Private Ocean client, it remains your responsibility to advise Private Ocean, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/ evaluating/ revising our previous recommendations and/or services, or  if  you  would  like  to  impose,  add,  or  to  modify  any  reasonable  restrictions  to  our investment advisory services. To the extent that a reader has any questions regarding the applicability of any  specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Private Ocean is  neither  a  law  firm  nor  a  certified  public  accounting  firm  and  no  portion  of  the  blog content should be construed as legal or accounting advice. A copy of the Private Ocean’s current written disclosure Brochure discussing our advisory services and fees is available for  review  upon  requestor  at Please note: Private  Ocean does not  make  any representations  or  warranties  as  to  the  accuracy,  timeliness,  suitability, completeness,  or  relevance  of  any  information  prepared  by  any  unaffiliated  third  party, whether  linked  to Private  Ocean’s web  site  or blog  or  incorporated  herein,  and  takes  no responsibility  for any  such  content. All  such  information  is provided  solely  for convenience  purposes  only  and  all  users  thereof  should  be  guided  accordingly. Please also note: If  you  are  a Private  Ocean client, please  advise  us if  you  have  not  been receiving account statements (at least quarterly) from the account custodian.