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When I was a student at Wash High, I always remember one math teacher who always demanded and expected your best effort. To this individual an education was the greatest gift one person could receive.

With the holiday approaching and the supply chain in chaos, maybe this year parents and grandparents should consider opening an educational savings account. Educational savings accounts, known as 529 plans, are state-sponsored education plans, named after a section of the Internal Revenue Service code. Funds deposited in 529 plans are invested in mutual funds and exchange-traded funds on a federal after-tax basis. Earnings aren’t taxed when withdrawn if used for qualified educational expenses for a beneficiary. Such expenses include tuition, books, computers, internet access, supplies, equipment and fees. College students enrolled at least half time can also include room and board. For K-12 students, the only allowable expense is up to $10,000 in tuition.

One of the benefits of using a 529 plan for college savings is that contributions to these plans are considered gifts for tax purposes. In 2021, that means you can contribute up to $15,000 per beneficiary ($30,000 per married couple) to a 529 plan without having to pay gift taxes. If you set up more than one 529 plan this year, you can contribute up to $15,000 to each without having to file a gift-tax return.

Even if you contribute more than $15,000 to a 529 plan in a calendar year, you still might not have to pay a gift tax because the excess can count against the lifetime estate and gift-tax exemption of $11.7 million.

Another nuance with gift-tax laws is that you have the option of “super funding” a 529 plan, using five-year gift-tax averaging. That means you can make a lump-sum contribution of up to five times the annual gift-tax exclusion, or $75,000 this year, in a 529 plan without paying gift taxes and treat it as though it were spread over five years.

In addition to the benefits stemming from the federal gift-tax exclusion, many states offer tax benefits on 529 plans. In Pennsylvania you can deduct your contributions from your taxable income up to $15,000 per beneficiary, per year. Married couples can deduct up to $30,000 per beneficiary, per year, provided each spouse has taxable income of at least $15,000.

Although there are no annual contribution limits to 529 plans, there are maximum aggregate limits ranging from $235,000 to $550,000, depending on the state. These maximum limits represent a state’s estimate of the full cost of attending college or graduate school in that state. The simple fact that states are estimating this high cost for future education should be a good reason to open an account today.

Total assets in 529 plans nationally are $464.3 billion, according to the College Savings Plans Network, a clearinghouse for 529 plan information. There are 15.3 million of the accounts, with an average value of $30,287.

With all 529 plans you will have choices of investments. Time horizons (when will funds be used) and risk tolerance (stocks versus bonds) will come into play. Check the ratings of the plans and understand their fees. The longer any investment is held, the greater return potential is possible. Starting early is always the best course of action. The gift of an eduction is a great and lasting gift.

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