Parents and Grandparents Giving the Gift of Higher Education

This holiday, do you want a gift that will really help you? Consider asking your parents and grandparents to open or contribute to a 529 savings account on your behalf. A 529 savings account is a state-sponsored account that allows contributions to grow tax-free. Depending on the state you live in, your parents and grandparents could get a tax deduction for adding to the account. (However, Kentucky isn’t one of the states that give a tax deduction.) The savings in the 529 account will grow tax-free until your family withdraws the money later to help pay for qualifying educational expenses such as tuition and textbooks. The more money your family puts into the account while you are in high school, the more money there will be to accrue interest before college.

Grandparents can be especially helpful when saving for college. If your grandparents want to open a 529 account for you instead of getting you gifts, then their account would not have much impact on your family's qualification for financial aid. And remember, it is helpful to have your family withdraw from the account only AFTER you file your financial aid applications during your last year of post-secondary education. Money used to pay for the first year and subsequent years of post-secondary education count as your (the student’s) income, which could reduce or lower the amount of financial aid you will receive.

Getting your family involved in your college saving plan comes with an added benefit. Students who know that their family intends for them to attend college have a much greater likelihood of enrolling. If your family were to add to a 529 account for the holidays, then you will feel more comfortable pursuing college knowing plans are in place. So consider proposing this unique gift idea to your family. You would probably like a college degree a lot more than new clothes they might pick out for you.

References:

College Savings Plans Network (CSPN). (n.d.) Retrieved from http://www.collegesavings.org/index.aspx

Couch, C. (2012). Tax-savvy ways to tap your 529 plan for college. Fox Business. Retrieved from http://www.foxbusiness.com/personal-finance/2012/08/14/tax-savvy-ways-to-tap-your-52-plan-for-college/.