A 529 plan is a college savings plan designed to help address future college costs including tuition, books, and other education-related expenses at most public (and some private) institutions of higher learning in the United States. 529 plans, also known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions, and come with many favorable tax benefits authorized by Section 529 of the Internal Revenue Code. Essentially, all of the money contributed, as well as any money earned while invested in a 529 plan, is allowed to be distributed free of federal income tax (and most state income tax) as long as it is withdrawn for qualified educational expenses. That means by setting up and contributing to a 529 Plan for a new baby, you are helping the baby (and his or her parents) pay for college and giving the stock market around eighteen years to have a chance to generate some significant, tax-free appreciation.
There are lots of technical questions to consider, like whether to go with a pre-paid tuition 529 plan or a college savings 529 plan (I’d go with the college savings plan because it gives the beneficiary more flexibility to choose more colleges in different states). You’ll need to select an initial investment allocation, but I usually propose an age-based portfolio that automatically addresses investment allocation going forward and reduces more-aggressive stock exposure as the beneficiary gets closer to college age. There are also limits on how much you can give a new baby in a 529 plan, but unless you are a pretty financially blessed parent or grandparent, these probably won’t come into play. Still, be sure to talk to your CPA or financial advisor before you proceed.
My point is that you really can give the gift of a 529 Plan because many plans and many states have relatively low minimum contributions ($25 or less in many cases) to set up a 529 Plan. Besides, even without the small initial contribution gift, by simply informing new parents about the huge potential tax benefits of a 529 Plan and giving them a mechanism to go ahead and start saving for college sooner rather than later, you are already doing a whole lot! Cute, little shoes are great, onesies are adorable, and dangling crib mobiles can be amusing, but I really am sold on the potential benefits of 529 Plans. Shoes, outfits, and toys are necessary and address a definite, immediate need, but helping a child (and their parents) graduate from college with less debt, or even no debt, is a pretty swell gift, too.
My wife and I haven’t yet given a 529 Plan to any of our friends or family members’ newborns, but we’ve told people about them. If you can give a little one you care about a 529 Plan, I encourage you to do so, but even if you don’t, you can give two baby gifts: a super-cute one and this very valuable information.