How do I set up 529 for my relatives?[ Edited ]
I have two grand nephews and one grand niece. Rather than buying Christmas gifts that they don't need (they get get PLENTY already from doting grandparents), we were thinking of donating to a 529 for their future. They all already have established 529s. Is it better to put into those established accounts or for us to set up our own separate accounts for them?
I love your dea of using a college savings plan as a Christmas gift for your grand nephews and niece. I hope there are a lot of grandparents and relatives that will follow your lead; it's a great alternative to seeing kids graduate with a boat load of student loan debt. Now that's a gift with some staying power!
As you know, the 529 college savings plan is a tax-advantaged way to save for college. Money invested in a 529 CSP will grow in a tax-deferred account and both contributions and earnings can be withdrawn tax-free to pay for qualified higher education expenses. A 529 CSP will have both an account owner and a beneficiary. The owner controls the account and has the flexibility to move from one plan to another or even change the beneficiary. Ultimately, any unused funds revert to the owner.
The control and flexibility that comes with being the account owner makes it something to consider as you decide which approach to take. For example, if one of your grand nephews decides not to go to college, you could change the beneficiary to your grand niece. Or if something bad happened and you needed the funds you would still be able to use them for your own purposes (earnings on this non-qualified withdrawal would be subject to tax and a 10% penalty). If you set up the accounts as the owner, you would have the option to name the benifciaries' parent as a successor owner. Finally, many states offer state income tax benefits when you contribute to a 529 CSP. If that's the case in your state, being the owner might allow you to reap those tax benefits. So, as I see it, those are the benefits of setting up the accounts on your own.
If you decide to contribute to the existing accounts you'll have to get the account numbers/address and ensure the administrator will accept your contribution directly or just give the money to the beneficiaries' parents. The upside here is that you just write the check and you're done--no account management, statements, decisions, etc.
In either case, the gift will be subject IRS gift tax rules. If you're going to make a big gift--over $14,000 to any one of your relatives, you'll want to consult your tax advisor. There are special gift tax rules associated with 529 CSPs, so they can be a great way to give a substantial gift, but those details are really beyond the scope of this answer.
Enjoy the holidays!