Without a doubt, one of the biggest challenges our younger clients face is the prospect of funding college education for their children. We hear from many parents who feel as though this is an unattainable goal. That’s understandable. The average annual cost of college in the U.S. for a public in-state university is around $25,000 and growing at close to 6 percent annually. For parents of multiple children, this goal becomes even more challenging. Thankfully, parents do not necessarily have to go it alone when it comes to education savings. We work with many clients who have grandchildren and wish to contribute money toward their college education but don’t know the best way to approach this. Fortunately, the 529 plan allows contributions from anyone to be placed in the account, and these plans offer potential benefits for those who make the contribution. For grandparents who do wish to help, 529 plans can be a very attractive way to accomplish this goal. With this in mind, let’s take a look at a few items of note for grandparents and the 529 plan.
Account Ownership and Beneficiaries
One nice feature of 529 plans is their flexibility in both who owns the account and the beneficiary of the account. Account owners can be any individual over the age of 18, a trust, or an institution. Beneficiary options include children, grandchildren, siblings, nieces/nephews, spouses, friends, or even yourself. So, just about anyone can be the owner of a 529 plan for the benefit of just about anyone. In addition, there is flexibility in terms of transferring ownership or changing the beneficiary on a 529 plan as well.
Tax and Estate Planning Benefits
One nice feature of 529 plans as a college savings vehicle is the tax benefits they provide. Earnings in the account can be withdrawn tax-free if used for qualified higher- education expenses. As it relates to estate planning, 529 accounts are held outside of your taxable estate, and contributions are treated as gifts for tax purposes. So, up to $14,000 per individual, (or $28,000 if filing jointly), will qualify for the annual gift tax exclusion as of 2017. Even more, account owners are allowed to treat contributions of up to $70,000, (or $140,000 if filing jointly), per grandchild as if they were made over a five- year period for gift tax purposes. In addition to Federal tax benefits, more than 30 states currently offer full or partial state tax deductions for contributions to a 529 plan. Six of these states offer taxpayers a deduction for contribution to any state’s 529 plan. So, while you are able to open a 529 plan in any state, it may be to your advantage do so in your home state. These tax benefits vary by state, so you’ll need to take this into consideration along with fees, investment options, and performance of each state’s plan offering.
Financial Aid Considerations
The devil is in the details when it comes to 529 account ownership and how it is viewed on the Free Application for Federal Student Aid (FAFSA). The FAFSA is the application students fill out in order to determine their financial aid eligibility each academic year. Assets held in a grandparent-owned 529 account are not reported on the FAFSA, but it is important to be aware of what happens once funds are withdrawn to help pay for college. Money from a grandparent or other relative- owned 529 accounts is considered to be untaxed income and is added to the student’s adjusted gross income on the FAFSA. The importance of this detail is that 50 percent of the student’s income will be added to the Expected Family Contribution (EFC) amount that is used to determine financial aid eligibility, and a higher EFC means less financial aid in this scenario. As you can see, ownership is an important consideration for 529 plans and financial aid.
While it may seem as though it can be difficult to make an informed decision on how to best help fund your grandchild’s college savings, the good news is that any additional assets invested for the future are beneficial and always appreciated by the parents. While the grandchild may not think this gift is as exciting as the hottest new toy or a gift card to their favorite store, you can rest easy knowing your money is going toward their future education. A financial advisor can help you sort through the details and evaluate the best approach for your specific situation to ensure your grandchildren reap the benefits of your thoughtful actions.