Contributing to college funds could be this year's best gift

(BPT) - Did you know the cost of a four-year college education has increased 38% at private schools and 32% at public colleges/universities over the past decade?^[1] Between these increasing college costs, lingering inflation and market uncertainties, many families are rethinking the gifts they're giving for the holidays, birthdays, graduations and more.^[2] Many are asking: Would a contribution to a family member's college savings account for their children be a more appreciated gift this year?

Apparently, most parents are on board with thinking outside the gift box. According to Fidelity's 2024 College Gifting Study, a whopping 74% of parents say they would welcome a contribution to their child's college savings account instead of traditional gifts and 62% would even prefer it. Looking back on their own experience, nearly 7 in 10 parents also say they would have been OK receiving fewer gifts as a child in exchange for more money in their own college funds.

When asked specifically about the holidays, parents in the "sandwich generation" are more likely to say they prefer more money be allocated to a college savings account instead of traditional gifts or experiences, with two-thirds of millennials and more than half of Gen X preferring those contributions for their kids (66% and 59%, respectively). In contrast, 47% of Boomers and 55% of Gen Z say they would prefer this kind of gift.

The study reveals the growing popularity of receiving gifts toward a child's college fund. Although parents say their friends and family typically spend about 61% of their gifting budget on traditional gifts or experiences, they would prefer gifts be split 54% versus 46% between traditional gifts/experiences and college savings account contributions for their children.

If a contribution to a college fund sounds like a gift you'd like to give or receive, you may want to learn about the advantages of a 529 education savings plan.

Benefits of gifting contributions to a 529 plan

For parents planning for their children's future, 529 plans are flexible, tax-advantaged accounts designed specifically for education savings. Funds in a 529 plan can be used for qualified education expenses at schools nationwide, including college expenses at postsecondary schools, tuition for K-12 schools, certain apprenticeship costs, vocational schools and student loan repayments. While your money is in a 529 account, no taxes will be due on investment earnings, and withdrawals for qualified education expenses are free from federal income tax.

If you want to contribute to a friend or family member's 529 plan, contributions up to $18,000 annually are not subject to the federal gift tax, and some states may even offer tax incentives for contributions by state residents.

Even better, in the event that the 529 account is not used for education (such as a child who chooses another path), legislative changes have determined that under certain conditions, 529 plan assets can now be transferred to a Roth IRA for the beneficiary, giving them a retirement boost. Parents can also transfer unused funds to another family member, such as another child, their spouse, extended family, or even themselves.

"A contribution to a 529 plan is a great option for anyone who wants to help give the gift of college this holiday season," said Tony Durkan, vice president, head of 529 Relationship Management at Fidelity Investments. "It speaks volumes about the importance of education, and helps families achieve their long-term goals in a real, tangible way."

There are no account minimums required to open a Fidelity-managed 529 account, and you can choose from a menu of portfolios managed by professional fund managers. All five Fidelity-managed plans are also rated Gold or Silver by Morningstar.^[3] Learn more about the firm's award-winning 529 plans and how to financially prepare your family for college at Fidelity.com.

How friends and family can participate

Ahead of the holidays or for any other special occasion, head to Fidelity.com/CollegeGift to learn more about gifting to a 529 plan.

Need assistance understanding your college savings options? Call Fidelity at 1-800-544-1914 for complimentary access to dedicated college planning representatives or visit Fidelity.com/529-plans/overview for more information.

Methodology

This survey was conducted by Big Village among a demographically representative U.S. sample of 3,008 adults 18 years of age and older. 874 respondents have children under 18 living at home and celebrate the holidays. This survey was live on October 1-10, 2024. Fidelity and Big Village are not affiliated.

The generations are defined as: Boomers (born 1946 - 1964), Gen X (born 1965 - 1980), Millennials (born 1981 - 1996), and Gen Z (born 1997-2012; only those ages 18+ were considered for this study).

Units of the portfolios are municipal securities and may be subject to market volatility and fluctuation. Please carefully consider the plan's investment objectives, risks, charges, and expenses before investing. For this and other information on any 529 college savings plan managed by Fidelity, contact Fidelity for a free Fact Kit, or view one online. Read it carefully before you invest or send money.

529 distributions for qualified education expenses are generally federal income tax free. 529 assets may be used to pay for (i) qualified higher education expenses, (ii) qualified expenses for registered apprenticeship programs, (iii) up to $10,000 per taxable year per beneficiary for tuition expenses in connection with enrollment at a public, private, or religious elementary or secondary educational institution. Although such assets may come from multiple 529 accounts, the $10,000 qualified withdrawal limit will be aggregated on a per beneficiary basis. The IRS has not provided guidance to date on the methodology of allocating the $10,000 annual maximum among withdrawals from different 529 accounts, and (iv) amounts paid as principal or interest on any qualified education loan of a 529 plan designated beneficiary or a sibling of the designated beneficiary. The amount treated as a qualified expense is subject to a lifetime limit of $10,000 per individual. Although the assets may come from multiple 529 accounts, the $10,000 withdrawal limit for qualified educational loans payments will be aggregated on a per individual basis. The IRS has not provided guidance to date on the methodology of allocating the $10,000 annual maximum among withdrawals from different 529 accounts.

Any earnings on distributions not used for qualified higher educational expenses or that exceed distribution limits may be taxed as ordinary income and may be subject to a 10% federal tax penalty tax. Some states do not conform with federal tax law. Please check with your home state to determine if it recognizes the expanded 529 benefits afforded under federal tax law, including distributions for elementary and secondary education expenses, apprenticeship programs, and student loan repayments. You may want to consult with a tax professional before investing or making distributions.

Under current law, the annual gift tax exclusion amount is $18,000. Annual contributions up to $18,000 from an individual tax filer ($36,000 for married-filing-jointly) per beneficiary are not subject to the federal gift or estate tax consequences.

Investing involves risk, including risk of loss.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

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