529 Plans - A Great Gift For A Baby
When you must get a gift for a baby's birth, consider opting for an investment gift. In all likelihood the parents have more baby clothes than they will ever know what to do with and since babies grow so quickly, the the chances are they will only be able to wear the outfit a few times at most anyway. Take whatever amount of money your were planning to spend on gifts and set it aside for the baby's education fund.
The amount of money given is of less importance in the long run than actually helping the parents get an account set up. This is because when the baby first comes they are so overwhelmed with other stuff that saving for college usually gets put on the back burner even if they know they should be doing it. By taking the time to do all the legwork and open an account for them, you'll be providing a valuable service for them as well as giving the parents an easy way to save for the child's education in the future.
Consider opening a 529 plan fund for the child. Not only does this give a small start to the child's college fund, you have helped out the parents tremendously. There are a couple of ways that you can do this: You can open the account in your name or help to open the account in the parent's name. Which is better depends on what your goal for the account is.
If you're looking to help the parents begin saving for the child's college education, then setting the account up in the parent's name and making a contribution to that account is the way to go.
If you are planning to help and make consistent contributions yourself to the child's fund, then creating the account in your name and making the child the beneficiary may be the way to go.
Some basic information about 529 plans for those that aren't familiar with this college saving opportunity:
The 529 plans are named after a section 529 of the Internal Revenue Code which established them.
Contributions to 529 plans use after-tax dollars. The money in the account grows tax-deferred. No federal or state taxes are owed if the funds are used for qualified college education expenses such as tuition, books, room and board.
The 529 plans are not a federal program. Each state has their own individual plans. It's not necessary to invest in your state's plan, but some states have added tax benefits for residents that invest in their state's 529 plan.
Each state usually offers a number of investment options under their 529 plan. The investment choices are usually conservative, with many offering plans where the investments gradually shift toward shorter term and safer investments as the beneficiary nears college age.
The funds in the 529 account can be used at any accredited public or private college in the United States - it doesn't have to be in the state where the plan is set up.
When you open a 529 plan account, the adult is the account holder with the child being the beneficiary
Most state 529 plans require a small minimum investment to open an account. Accounts also have maximum amounts that can be contributed for any one beneficiary.
It's usually possible to contribute through payroll deductions.
It's possible for a number of people to open accounts for the same child as long as the combined amount does not exceed the plan's maximum level.
If the money in a 529 plan is used for expenses other than those specified as qualified college expenses, the earnings are subject to taxes. In most cases, this is a 10% penalty.
The account owner may change beneficiaries if they wish.
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