The Grandparents Guide to 529s
Updated: Nov 9, 2021
Being a grandparent is, by all accounts, one of life’s greatest pleasures. You get all the joy of parenting without the daily responsibilities. And no matter how close – literally or figuratively – you are to the next generation, you can play a huge role in a grandchild’s life by helping fund their college education.
A 529 plan is one of the best vehicles for most grandparents to help their grandkids pay for college. (It’s also a great choice for parents who want to help their children by saving early!) Assets in a 529 grow tax-free, and all withdrawals are exempt from federal taxes when used for qualified education expenses.
Whenever you make this choice, your grandkids will be better off for it. And they won’t be the only ones thanking you. Their parents will be thrilled to know someone (anyone) is helping cover the cost of college, which is astronomical.
The inflation-adjusted costs for four-year private colleges have roughly doubled over the last 20 years, and more than tripled for public institutions, according to the College Board. Today, the average private college costs more than $70,000 per year, including room, board and tuition. The projected cost for a child born today to attend such a school is more than half a million dollars, assuming 3% inflation.
Even the relative “bargain” of in-state college now costs more than $20,000 per year, and it’s projected to cost over $140,000 in 18 years. With sums like that, every little bit helps. And you’re not just alleviating immediate financial burdens. Funding part of a grandchild’s college education can help them avoid having to take out student loans, or at least less of them.
Student loan debt is crippling many Americans today. And it’s not just a financial problem – the burden of student loans can stunt a person’s development. The psychological toll of being in debt can be devastating. Helping your grand-children avoid this fate will put them on a better path for a long and happy life.
Use 529 Plan Rules to Your Advantage
Of course, the devil is in the details – even with something as heartfelt as helping a grandchild pay for college. Here are five tricks to make sure your money goes as far as possible.
Every bit helps. Under current law, grandparents can give up to $15,000 annually per grandparent to each grandchild, or as much as $75,000 each in a one-time gift to cover five years. Whatever the amount, grandparents can give their grandkids a huge advantage by funding a 529 on their behalf.
Location matters. When opening a 529, start with the home state 529 plan where the grandparent lives rather than the state where the child lives. Some states offer tax reductions or credits for residents, which may not be applicable for a nonresident.
What’s in a name? It might not seem like a big deal when you’re setting up a 529, but whose name the plan is in matters a lot. To get the benefits of your home state plan, the assets need to be in the grandparent’s name rather than the student’s. Also, financial aid can be reduced upon distribution of 529 plans opened by grandparents. Up to 50% of such plans are counted as the student’s asset, compared with just 5.6% for accounts owned by the student or their parents. (As an aside, up to 20% of non-529 assets count as the student’s income for financial aid purposes.)
Timing is everything. To avoid any potential issues with financial aid, you may want to use the 529 assets to pay for the student’s junior or senior year.
Because federal financial aid is based on income from the “prior prior year” – i.e., two years before the application is made – those assets will not be considered for junior year calculations, and senior year is not factored into future federal student aid.
This scenario assumes the student is on track to graduate from a traditional four-year institution. Adjust accordingly if that’s not the case; what matters most for financial aid purposes is what year the assets come into the picture.
It’s never too late. If you didn’t or couldn’t save early in a child’s life, don’t despair! Grandparents can pay tuition directly to an accredited institution, and none of it counts against the annual $14,000 gift exclusion.
But again, timing is everything. Wait to chip in until the student’s junior or senior year if they’re applying for financial aid.
Paying all or part of a grandchild’s tuition is the ultimate gift. For the grandchild, the benefits last a lifetime. For grandparents, it can spark a living legacy you can see and enjoy.