College-Savings Plans Make It Easy to Give a Child the Gift of Tuition

Question: A few of my family members would like to contribute money to my son's 529 college-savings account as a gift. How do they do this, and will they be able to get a state income tax deduction?

Answer: Many 529 administrators are making it easier for people to contribute to 529s as gifts. T. Rowe Price, for example, recently introduced a GoTuition gifting portal for its 529 accounts. An account holder can create a profile page online, then share a custom URL for family and friends to make a direct deposit from their bank into the 529 account. Several plans (such as the Colorado CollegeInvest 529, the DC College Savings Plan, College Savings Iowa and Missouri's 529 College Savings Plan) participate in the Ugift program. The program lets you sign up for a code that you can share with family and friends to enable them to contribute to the account online; they don't need to be related to the beneficiary. Go to your plan's website to find out whether it participates in the Ugift program or offers other steps that relatives and friends can take to contribute.

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Tax rules vary by state. About two-thirds of states offer an income tax deduction for 529-plan contributions. You generally need to contribute to your own state's plan to get a state income tax break. But a few states, such as Arizona, Kansas, Missouri, Montana and Pennsylvania, let you deduct contributions to any state's 529 plan. Most states let you deduct a contribution you make to someone else's account, but a few, such as New York, let only the account owners deduct contributions. You can find out more about your state's rules at SavingForCollege.com.

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If you live in a state that offers a tax break only to account owners, see if you can qualify for the deduction by opening a separate 529 account. You may need to open the account in your own state to qualify for the tax break, unless you live in one of the states that lets you deduct contributions to any state's plan. There's no limit to the number of accounts that can name a child as a beneficiary. If the child doesn't go to college or doesn't need the money, you can switch the beneficiary to another eligible relative of the child, such as a parent, sibling or cousin. See the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education, for more information about 529s, as well as a full list of eligible relatives of the beneficiary and other rules.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.