In December, I made the decision to stop buying my nieces and nephew gifts for Christmas and birthdays. It’s not as awful as it sounds -- I decided to open 529 savings accounts for all of them instead.
A 529 plan is a savings and investment vehicle for educational expenses like college tuition and textbooks at eligible education institutions. Most states offer at least one 529 plan, though they all look a little different based on their tax benefits, variety of investment elections, penalties for rollovers, etc.
It’s no secret that I have credit card and student loan debt. I’ve read several times that if you’re in credit card debt, pay off the debt before setting money aside in a child’s college fund. The rationale is sound; one of the most important things you can do for your children is to be debt-free. That being said, gifts are a line item on my budget and I allocate money for them accordingly. For my nieces and nephew, when it comes time for gift-giving, I would rather contribute to their 529 account than buy them a toy, especially when they get toys from so many other people.
My decision to do this was made for a number of reasons:
If you are a Colorado resident, contributions to the 529 plan offered by the State of Colorado are an above the line deduction on your state taxes; any contributions will reduce your taxable income dollar for dollar. This deduction can be used in addition to the standard deduction. For example, if you earned $35,000 in 2014 and contributed $500 to a 529, you can use the deduction to reduce your taxable income to $34,500.
Ideally, I’d place their gift money into a savings account and watch the money grow. Even in a savings account with an unusually high 1% interest rate, the money will likely be losing out to inflation. The return on the moderately aggressive 529 portfolio I’ve placed their funds into is 6.43% since its inception. It has more risk than a savings account, but over the long haul will likely earn them more money for college.
A common misconception about 529s is that you can’t open one in your child’s name until they have been born. Technically, that’s correct because you need their social security number and date of birth. However, there is nothing stopping you from opening a 529 in your name, and when your child arrives making them the beneficiary of the account. Longevity is the strongest ally you’ll have in an account like a 529. By beginning this process years before you have children, you’re giving that money more time to grow.
No more guessing
Instead of hoping that I’m in tune with what kids like these days, I deposit money by electronic debit into the 529 account on their birthdays or any other day of the year. No more running to the store at the last minute to buy a gift they’ll play with for a week. No more belated birthday presents that will break, wear out, or lose favor. No more toys cluttering up the basement. No more throwing away money that could be used for something as valuable as education.
If I want to give other people the opportunity to directly contribute to the 529 accounts, it’s easy through UGift. UGift is a service that works with many 529 plans and allows me to send out invitations electronically to my friends and family so they contribute to the 529s for birthdays or holidays as well. There is no fee for either party. If UGift isn’t available for a 529 plan, anyone can send a check directly to the organization administering the 529 that will be deposited in the account. Just make sure the account number is written on the check.
The gift of freedom
I see my gift as opportunity for my nieces and nephew to avoid incurring substantial debt in their collegiate journeys. Without the burden of overwhelming debt, they’ll have more choices. If an unpaid internship comes up, they can apply without worrying about how they’ll afford to pay their student loans. Their decision on which major to study will hopefully be influenced more by their passion than by cost. Lastly, whatever their post-college goals are: buying a home, travelling, etc., they won’t be delayed by the threat of large student loan payments.
What if one of them decides not to pursue college? A 529 plan allows the account holder (me) to change the beneficiary at any time. There are stipulations on whom I can change the beneficiary to, but they’re reasonable. If my niece decides to forgo postsecondary education and instead start her own business, I can easily transfer the money to her sister’s or cousins’ 529 account, without a penalty.
On the other hand, if I want my niece to use the money to start her new business, that is a possibility. A 10% penalty would be imposed, and in Colorado, any tax savings I had received from deductions related to the 529 on my state taxes would have to be paid back. It’s good to have options though.
The ability to earn even more money for college
UPromise, a rewards program affiliated with Sallie Mae, allows you to earn extra money for college by buying groceries and gas, eating out or shopping online. When you shop at businesses that have partnered with UPromise, you have the opportunity to receive cash back that goes into a 529 account or toward your student loans through Sallie Mae. It’s very simple to get signed up by simply enrolling and registering your debit or credit card with the program. The restaurant rewards are especially generous -- the more you spend in a year, the higher the percentage UPromise gives as cash back.
Right now my rewards go toward my student loans. When those are paid off, I’ll have the rewards go toward my nieces’ and nephew’s 529 accounts. Anyone can sign up, which means my grandparents, uncles, aunts and friends can also register their cards and direct their rewards to my nieces’ or nephew’s 529s as well. For more information on UPromise, check out my review of the program.
A teachable moment
In their eyes, I might be labeled as the cheap uncle that doesn’t give them gifts they can play with, and I’m okay with that. In lieu of showing up empty-handed on holidays, I’ll give them their account statements. Their balances going up and down will help them begin to understand the principles of saving and investing, risk and time. The hope is that when they get their first paycheck, they’ll apply this knowledge to save for their future, because they’ll know firsthand what a little money set aside can do.