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Michelle Singletary: Instead of toys, consider contributing to a 529 plan

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The College Savings Foundation has a great idea for what to buy the children in your family.

Now I must warn you, the gift, as you might already suspect, won’t make the children screech with joy. But be brave this holiday season and trade toys for tuition.

Before you just huff and tell me I’m acting like Scrooge, hear me out. Consider what the foundation is proposing. Rather than buy a bunch of toys that will eventually end up in the bottom of a toy bin, broken or discarded for some newer electronic gadget, contribute money to a 529 college savings plan.

Christmas, Hanukkah or Kwanzaa is a great time for family members — grandparents, aunts, uncles and godparents — to give the children in their lives a gift that will ease their financial burden in the future. I’ve made a distinction here by calling on relatives, not necessarily parents, because they have a bit more freedom to give such a wonderfully practical gift.

“We are not suggesting you give all dollars and no toys, but exercise a combination of this smart giving strategy,” said Peter Mazareas, chairman emeritus of the College Savings Foundation.

Mazareas says he’s opened four 529 plans: one for a niece and three for his goddaughters. “For aunts and uncles and other relatives, the message is split your gifts. Buy something, but then take $50 or $100 per holiday and put it in a 529 plan. Over time, the plan can build up to a significant contribution toward the child’s education.”

There are two types of 529 plans: prepaid tuition plans and savings plans. A prepaid plan allows you to pay for tuition in advance. The more popular savings plan allows you to invest in a tax-deferred investment account. Money withdrawn from a 529 investment account is free from federal tax (and in most cases free from state and local taxes as well) when used for qualifying college costs. Additionally, many states offer tax deductions for residents who make contributions to a 529 plan.

Although the 529 plans are state-sponsored, you can invest in any plan regardless of where you live. And money invested in a 529 plan can be used for a state or private institution. Every state and the District of Columbia offers at least one 529 plan. For more information, go to www.savingforcollege.com.

If the children fuss about your gift, tune them out by considering these five reasons that the foundation says a 529 makes a great stocking stuffer:

●Department of Labor statistics show that people with only a high-school diploma have twice the unemployment rate of college graduates.

●Saving today means less debt tomorrow. College seniors who graduated with student loans in 2010 owed an average of $25,250, according to a new report from the Project on Student Debt at the Institute for College Access and Success. The amount of overall U.S. student-loan debt is getting close to $1 trillion. Student-loan debt has already surpassed total credit-card debt.

●You can contribute a maximum of $13,000 per year per beneficiary without incurring federal gift taxes. Under a special rule, people contributing to a 529 plan can make a lump-sum contribution per beneficiary of up to $65,000 ($130,000 for couples who are married filing jointly), which is equal to five years’ worth of the federal annual gift tax exclusion. However, you can’t make another contribution to that beneficiary during the five-year period if you give the maximum amount.

●You might not be the favorite gift-giver now, but just wait. As the child gets older and begins to start worrying about paying for college, you’ll become a hero.

●You keep control. A 529 plan is a great way to ensure gift money intended for college is used for that purpose. You don’t have to be the child’s parent or legal guardian to open an account. You just name the child as a beneficiary. Should the child not need or want the money, you can transfer it to someone else, including yourself. If you want to cash out the account, you can do that, too. However, you will have to pay taxes and a 10 percent federal tax penalty on the earnings.

I know. You’re still thinking that handing a child a note or a holiday card that says you’ve contributed to his or her 529 plan doesn’t deliver the “wow” moment. But just tell the kid that you were following the advice of someone who has seen the future of so many broke and heavily indebted college graduates. Blame it on me.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071. Her e-mail address is . Questions are welcomed, but because of the volume of mail, personal responses may not be possible.

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