Opinion: Floods open doors for grandparents to supersize college savings for grandkids

If you’re a grandparent looking to save a day by helping your grandchild pay for college, reconsider your tax-advantaged 529 college savings plan before the end of the school year.

Change the rules Federal financial aid calculations in 2023 mean that new investment opportunities will open up for family members to help without compromising financial assistance.

Covering the hefty cost of college can be tough when you’re beyond the nuclear family. Not all generations have the same level of wealth and their ups and downs don’t always match when it comes to financial aid calculation. For example, you may want to start saving when your baby is born, but you don’t know what the whole family’s financial situation will be like 17 years from now.

Financial planner William Bevins talking to grandparents all the time who say they want to help but don’t know the best way.

“It’s like anything else with taxes – we have to make sure we’ve looked at all of our options,” says Bevins, who is based near Nashville, Tenn.

Ascensus, the administrator of 529 plans, doesn’t officially track the relationship between account holders and beneficiaries, but its data shows correlations that indicate a small disparity between grandparents compared to tiers. supposed parents.

Ascensus data also shows ownership flows have not changed since 2011 and grandparents with financial advisors tend to open more accounts than those who do it themselves.

Account Ownership of Parents vs. Grandparents

Source: Ascensus

College funding takes a village

Egrandparents tips for opening 529 college savings accounts – or really any investment account, custodial account or otherwise – comes with one big caveat: Any money from a non-parent given to a student upon eligibility All support can be counted as the student’s income and is valued at a much higher rate than the parent’s assets. Getting it right requires communication.

Let’s say you gave $5,000 to a high school student as a gift in May 2022. They must report that amount as income on the Free Application for Federal Student Aid (FAFSA) in this year – for their sophomore aid package – and the result could be that the university reduces its award to $2,500. However, if the parent reports a savings of $5,000, the university will only deduct 5.6%, or $280, used towards tuition.

Some families have avoided this by waiting to use money from grandparents and other relatives until after the second year, when they have exhausted their reporting obligations. But strategic planning will not be necessary starting with the FAFSA for the 2024-2025 school year (to be filled in fall 2023), when students are no longer required to report external financial contributions.

So starting now for next year, “grandparents can use the 529 and start leveraging it for estate planning,” says Robert Farrington, founder of the 529. College Investor.

One note still: This only applies to the FAFSA, and some schools use a secondary financial aid report called the CSS Profile, which may still inquire about external donations and consider they are student income.

Tax allowance for grandparents

The most immediate tax benefit of contributing to a 529 plan is in your current year state tax if you live in one of more than 30 states and the District of Columbia offers a direct deduction. An additional incentive to contribute before the end of the year is because of both stocks

and bonds

still down, you will start from your account by buying at low price.

The main long-term benefit is tax-free growth as long as you use the funds for qualified educational expenses (or face a 10% penalty and taxes on the growth). The estate planning aspect is for those with the potential to make large contributors – up to five years multiplied by the IRS annual gift limit. For a pair of grandparents, that amounts to $160,000 per grandchild by 2022 ($170,000 in 2023).

Grandparents with young grandchildren will be the most interested in the rule change, because you get the most benefit from your tax-free growth when you start early and let it accumulate over the years. For those who’ve been through this before with older kids, Bevins thinks they’ll feel unrestricted.

“It will make some grandparents want to fund more than they had in the past. They will consider this gift to be completely accessible and of full value, while before they are penalized,” he said.

529s compared to other options

While some savers don’t like the aspect of 529s locking money away for educational purposes, the accounts are actually quite flexible. If you have grandchildren spread across the age bracket, you can optionally transfer the money from one beneficiary to another, or use it for private school tuition. You can save now for unborn babies and just have them credited when they arrive. For grandkids who have graduated, you can help them pay off loans up to $10,000, just like your personal loan. Student loan forgiveness program. You can even use the money for yourself if you take a qualifying class.

However, there are still other options for saving without such parameters. Ascensus says some grandparents have told them they don’t want to work with a college savings account, and just want to give money. So far in 2022, Ascensus has processed more than $250 million into 529 through its Ugift program, with nearly $2.7 billion donated since the feature launched in 2007.

Grandparents can save minors directly in a custodial account, usually at a bank or brokerage firm, but be aware of the rules that these will be passed on to the beneficiaries. in adulthood, possibly 18 in some cases. UNest is a service that helps families set up these accounts, primarily for parents, but with an easy gifting option for loved ones. Ksenia Yudina, executive director of UNest Advisors, says the average balance for UNest accounts is $700 and the average gift amount is $80. That is over $25,000 in 529 secondsaccording to the College Savings Plan Network.

“We see a lot of grandparents giving gifts around Christmas, birthdays and Halloween,” says Yudina.

Grandparents can also just save in brokerage account, transaction tax incentives for flexibility. But a final note is that in most plans, there’s no limit to how long you have to keep the money in your 529 account before you spend it, so you can wait and at least get a state tax deduction. if you qualify.

More from MarketWatch

It’s harder for me to look at my 529 balance than my 401(k) because I’m in middle school. Here are some tips for parents on a similar timeline.

If FAFSA makes you look too rich, here are 4 steps to boost college financial aid

Amendment to the student loan forgiveness program is seen as potentially giving many civil servants a second chance at writing off student debt.


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