Encourage non-parents to consider opening a 529 plan for a favorite child

If it doesn’t already come to mind with most clients, here’s a reminder: Just about anyone can open a 529 college savings plan for a child. The client doesn’t need to be a parent. Aunts, uncles, stepmothers and fathers, guardians, and family friends can open one too. All a client needs is a favorite child. The client may get a state tax deduction and a way to reduce their taxable estate — and to feel good about helping educate a child.

Here are some important considerations to discuss with a client.  

Explain the tax benefits

Contributing to a 529 plan may help a client reduce their state income taxes. Thirty-four states and the District of Columbia currently offer a state income tax deduction or tax credit. (Contributions to 529 plans aren’t federally tax deductible.) In most states that offer tax benefits, anyone who contributes to a 529 plan can get a state income tax deduction. In 10 states, however, only the plan account owner can claim a tax benefit. Get 529 tax benefits by state.

Suggest the right plan

Since there are many 529 plans to choose from make sure a client understands the differences. Plus, a client isn’t required to choose the 529 plan from the state where the child resides. Here are three things to discuss with a client:

Tax benefits: In some states, the account owner only gets the tax deduction for contributions to the state’s plan. Some states give the account owner a deduction no matter which state plan they contribute to. Should a client always base a decision on tax breaks? In general, if a child is young, lower fees are more important. That gives more of the investments the opportunity to grow without being reduced by fees. If the child is older, a tax break may be more advantageous.

Fees: Explain the fees for management and administration, investments, account maintenance, and transactions. You can do a comparison of plans to show how they differ.

Investments: If a client wants a particular investment and their state plan doesn’t offer it, another state may. For instance, they may want guaranteed, principal-protected, or FDIC-insured bank options. They may also prefer a particular fund manager. Explain that they aren’t locked into the investment they choose when they first open an account, although IRS regulations only allow exchanges from one investment option to a different one twice in a calendar year.

For those less comfortable with risk and more of a set-it-and-forget-it investor, an age-based portfolio, which automatically becomes more conservative as the child approaches high school graduation, may be a good choice. For those more aggressive (who understand the risks), a static portfolio might be right. Remind them that being too conservative for too long may be risky. They may miss out on growth potential and the ability to save enough for the rapidly rising cost of college.

Learn about the investment portfolio options in Invesco’s CollegeBound529.

Determine when and how much to contribute

There’s flexibility when contributing to a 529 plan, so encourage a client to choose what works best for them.

Accelerated gifting: A special provision allows a person to make five years of contributions (the current year plus four future years) in a single year.¹ In 2023, the annual gift amount is $17,000, so a person can contribute $85,000 and a married couple $170,000 to a 529 plan. A client can gift to as many people as they want in a year, so they can superfund a 529 college savings plan for as many children as they want.

Automatic contributions: (also called recurring contributions) A client can set up regular contributions from a bank or investment account on a schedule they want — weekly, monthly, quarterly, or semi-annually, for example.

Payroll contributions: Some companies allow contributions directly from a paycheck to a 529 plan. Suggest the client check with their HR representative.

Encourage them to talk with the parents

It’s important for the client to talk with the child's parents. They’ll need the child’s Social Security number to open the 529 plan. Discuss financial aid implications, although starting with the 2023-2024 school year, withdrawals from non-parent-owned 529 plans will no longer be considered student income.

Also let them know that when it’s time to use the money, they’ll need to discuss withdrawals and coordinate who’ll pay which expenses. Money from a 529 plan can be used for college-related expenses, as well as K-12 private school tuition. Explain that it’s critical to not withdraw money that won’t be used for qualified expenses, or they’ll have to pay taxes and a penalty on the earnings portion.

For more ideas on ways to help guide a client, request our Education Savings Toolkit.