As the cost of a college education continues to climb, many grandparents are choosing to help. This trend is expected to accelerate as baby boomers, many of whom went to college, become grandparents and begin considering gifting strategies. Helping to pay for a grandchild’s college education can bring great personal satisfaction and is a savvy way for grandparents to pass on wealth. Owning and contributing to a 529 College Savings Plan might be a great option, but there are benefits and drawbacks to consider.
What are the benefits?
Our clients often ask what they can do with the required minimum distributions they are required to take from IRAs beginning at age 70.5 if they do not presently need the money. This presents an opportunity to fund a grandparent-owned 529 plan to help with the cost of higher education, while removing assets from the taxable estate. As an additional benefit, some state-sponsored plans allow for a state income tax deduction to those who contribute to the plan. Grandparents, as well as other taxpayers, can take advantage of accelerated gifting using 529 plans. In 2013, $70,000 can be contributed in one year. This dollar amount represents five years of gifts at $14,000 per year (2013 annual gift tax exclusion). A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2013) to a beneficiary’s 529 plan account without adverse federal gift tax consequences.
How can a 529 affect financial aid?
Money in a 529 plan owned by the grandparent is not considered an asset by the federal financial aid formula when the student applies for financial aid; however, funds in a parent-owned 529 plan will be a factor in the formula. Under current federal financial aid rules, grandparent-owned 529 plans are not counted as a parent or student asset, but withdrawals from a grandparent-owned 529 plan are counted as student income, which can affect student aid eligibility in the following year. The opposite is true of parent-owned 529s. Withdrawals from parent-owned and student-owned 529 plans are not counted as student income. Some planning experts advise that 529 funds could be used to pay for the final year of college and eliminate the effect of income on financial aid as the student will not need to apply for aid in the following year. For more information regarding financial aid and the FAFSA form, please click here.
While funding a 529 college plan is generous gesture, gifting away assets might have a negative impact on other facets of planning. For example, the state Medicaid agency might require an owner of a 529 to spend down those funds before any payments for medical or long-term care needs are paid. While this might not be a primary concern, it is something that needs to be addressed in the planning phase. 529 plans have many aspects and it is important to consult with a CERTIFIED FINANCIAL PLANNER™ practitioner in order to decide what best fits your situation. We welcome your questions.