With Christmas fast approaching, many families are finalizing their holiday shopping. While toys, clothing, and the latest tech are always appreciated, why not also consider a gift that lasts a lifetime: the gift of education? A contribution to a 529 college savings plan can grow over time and provide a lasting impact that benefits a loved one well into adulthood. Here’s why gifting to a 529 account is a thoughtful and rewarding option this holiday season, along with key details to consider when making your contribution.

What Is a 529 Plan?

A 529 plan is a tax-advantaged savings account designed to help families save for future educational expenses. These plans offer significant benefits, including tax-free growth and withdrawals when funds are used for qualified education expenses such as tuition, fees, room and board, books, and supplies. Moreover, 529 funds can also cover K-12 education, apprenticeship programs, some student loan repayments, and potentially even Roth contributions.

How Much Am I Allowed to Gift in a 529?

You might be wondering, “How much am I allowed to gift in a 529?” The IRS allows individuals to contribute up to $18,000 per recipient annually (or $36,000 for married couples) in 2024 without triggering gift tax reporting (this limit increases to $19,000 per person in 2025). The IRS also allows for “superfunding” a 529 plan, a strategy that lets you bundle up to five years’ worth of annual gifts into a single contribution. This means you can contribute up to $90,000 (or $180,000 for married couples) in one year. See “tax considerations”, below, for gift tax ramifications of exceeding these amounts or gift splitting with your spouse.

What Are Qualified Education Expenses?

Qualified education expenses, which can be removed tax-free from a 529 plan, include room and board costs charged by the college or other qualified educational institution. Students living off campus can also count their rent and food (aka board) costs up to the allowance determined by the institution’s cost of attendance, which is published by the financial aid office annually. The expenses for rent and food must be documented like any other expenses paid for with 529 plan distributions. Note: Students must be enrolled at least half time to count these expenses as qualified and thus eligible to be reimbursed using 529 plan funds.

There are several expenses you cannot use a 529 plan to fund, including:

• Transportation and travel costs to and from college
• Health insurance (even if offered by the school)
• Sports and activity fees from the college

Does Computer Equipment Count as a Qualified Education Expense?

The costs to purchase a computer (desktop or laptop), mouse, keyboard, speakers, webcam, headset, monitor, modem, Ethernet cable, software, Wi-Fi extender, etc., are considered qualified education expenses and can be reimbursed using 529 plan funds. Expenses related to internet access can be reimbursed too. These expenses have to be related to equipment used primarily by the beneficiary (sorry, no buying a new laptop for Mom or Dad) during a year that the beneficiary is enrolled at an eligible postsecondary school. Any expenses related to computer software for sports, games, or hobbies do not count as qualified expenses. There is a lot of discretion here, but there is no limit on the amount of 529 plan money that can be used for this purpose.

Can I Use My 529 Plan to Pay for K-12 Education?

You may be able to use your 529 plan to pay for K-12 education expenses, including private school. The Tax Cuts and Jobs Act of 2017 expanded the definition of qualified expenses for 529 plans to include K-12 education at private, public, or religious elementary, middle, and high schools. If you have children younger than college age, have grandchildren, or expect to have grandchildren in the future, this may be something to consider. These expenses are limited to $10,000 per beneficiary per calendar year.

Can I Use My 529 Plan to Pay for Vocational School?

529 plans can be used to pay for postsecondary education at any educational institution that accepts federal financial aid. This includes vocational/trade schools that don’t fit into the traditional four-year college mold. The list of vocational professions is long and includes licensed practical nurse, dental hygienist, chef, real estate agent, HVAC technician, air traffic controller, interior designer, programmer, and heavy equipment operator.

Can I Use My 529 Plan to Pay for an Apprenticeship Program?

529 plans can be used to pay for certain apprenticeship programs. The SECURE Act of 2019 expanded the definition of qualified expenses for 529 plans to include qualified costs for apprenticeships, including related fees, books, supplies, and equipment. The student must be participating in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act. Careers that require an apprenticeship include solar installer, electrician, pharmacy technician, commercial driver, fire system installer, carpenter, and plumber.

Can I Use My 529 Plan to Pay Student Loans?

529 plans can be used to pay up to $10,000 in student loans per beneficiary. The SECURE Act of 2019 also expanded the definition of qualified expenses for 529 plans to include some repayment of student loans. This repayment can be made on federal or private student loans of the 529 plan-designated beneficiary or their brother, sister, stepbrother, or stepsister. In other words, since there can only be one designated beneficiary per 529 plan, parents would not have to set up a new 529 plan for their other kids to take a distribution to pay for their student loans.

Can I Use My 529 Plan to Pay for Studying Abroad?

529 plans can be used at certain foreign institutions as well. Saving For College has a handy tool that lets you look up your school’s code to help determine whether it is 529 eligible.

How Do I Contribute to a 529 Plan?

When choosing a 529 plan, keep in mind that each state typically sponsors its own plan, but you are not restricted to the plan offered by your state of residence. For instance, at Milestone, we recommend Utah’s My529 plan due to its low fees and great investment options.

My529 makes contributing straightforward, whether it’s to your own account or someone else’s. Contributions can be made online, by check, through payroll deduction, or via a gift program. The gift program allows you to create a personalized code to share with friends and family, enabling them to contribute securely. They can even choose to make their contributions anonymous, and printable gift notice certificates are available to provide something tangible for the occasion.

Can I Set Up a 529 Plan for My Grandchild?

We often recommend grandparents set up 529 plans for their grandchildren. You must be mindful of the gift tax ramifications, described below, but payments of tuition only made directly to a qualified educational institution are gift tax-free (and don’t use up your annual exclusion). Since these direct payments are only exempt from gift tax to the extent they represent tuition (not room and board), it may be best to pair a 529 plan with direct payments for college for your grandchildren.

Tax Considerations

Hopefully, you’ve now been convinced of the benefits of a 529 plan, but proceed with caution if you’re considering fully funding someone’s education with a single transfer today. Gifts made directly to individuals could trigger the often overlooked gift/estate tax. While there are significant nuances to this rule, let’s cover the basics.

An annual exclusion amount applies to gifts of a present interest, which avoids tax or reporting requirements. As discussed above, in 2024, the exclusion amount is $18,000, which will increase to $19,000 in 2025. A gift of present interest means the recipient can use or enjoy the property immediately. However, a 529 plan is an exception to this rule and qualifies for the exclusion. If you give more than the annual exclusion amount, you are still unlikely to owe taxes due to the much larger lifetime exemption, which is $13.61 million in 2024 and will increase to $13.99 million in 2025. However, exceeding the annual limit or gift splitting with your spouse requires filing a gift tax return (IRS Form 709) to report the gift, which could involve additional administrative effort and costs.

As mentioned earlier, “superfunding” a 529 plan also allows you to combine up to five years’ worth of annual exclusions into a single contribution. Superfunding jumpstarts tax-free growth while preserving your lifetime exemption. Keep in mind that this approach also requires filing Form 709 to make the necessary election but is likely worth the hassle.

Can I Take a Distribution from My 529 That Is Not Used for Education?

You can take distributions from your 529 plan that are not used for education, but any earnings in the account may be subject to a 10% penalty and federal and state income taxes. It is important to note that this applies only to the earnings in the account and not the contributions made over time. For example, if you contributed $100,000 to a 529 plan and the investments in the plan earned $20,000 while invested, only the $20,000 is subject to income tax and the 10% penalty.

Earnings are calculated on a pro rata basis with each distribution, and all 529 plan custodians keep track of the earnings related to the remaining balance in the plan over time. With each distribution, some of it comes out as contributions and some of it comes out as earnings. Every distribution, even qualified ones, comes out with some principle and some earnings.

There are certain circumstances in which the 10% penalty is waived: if the beneficiary dies, if they become disabled (defined as the beneficiary not being able to do any substantial gainful activity because of a physical or mental condition), if they attend a U.S. military academy, or if some/all of their qualified education expenses were used for purposes of the Lifetime Learning Credit or American Opportunity Credit. If the 529 plan beneficiary received scholarships, veterans’ educational assistance, employer-provided educational assistance, or other nontaxable payments (other than gifts or inheritances) for educational assistance, the penalty would not apply to distributions up to the total of these items.

Other Education Gifting Options

Since we want you to have options, another choice to consider when gifting towards an education is an Education Savings Account. They offer similar tax advantages to 529 plans but also provide more flexible investment options. That said, they do have lower contribution limits ($2,000 per year) and stricter age and income restrictions.

The Impact of Gifting Education

The holiday season is a time for giving, and a contribution to a 529 plan is a gift that truly lasts. Unlike material presents, which quickly fade in value, a 529 plan provides a lasting investment in a loved one’s future. By easing the financial burden of education, you open the door for them to achieve their educational goals without incurring burdensome debt. And don’t limit your generosity to the holidays: birthdays, graduations, and other special milestones are perfect opportunities to contribute to a 529 plan!

If you’d like personalized guidance planning for educational goals or understanding how to maximize the benefits of a 529 plan, please reach out to our team.