The cost of university education has increased so much that many families rely on two generations to cover their costs.
There are parents, who are saving more and more in 529 education savings plans, where earnings are tax free if they are used for qualifying education expenses. Then there are the grandparents, who join the mission to educate their children who are less indebted. They also save in 529 shots.
Here is the problem. Many grandparents are concerned that their 529 contributions are hurting their grandchildren in the federal funding process.
The free federal student aid application (FAFSA) examines the income and assets of parents and students. A 529 belonging to a grandparent is not the subject of a report on the FAFSA.
But once the money is withdrawn from a grandparent 529 and used to pay for college expenses, it is considered income for the student and must be recorded in the FAFSA. Since up to 50% of a student's income is considered available to pay for college education, the money used by a grandparent's 529 can reduce the amount of money a student can earn. help up to half the amount of the distribution.
Grandparents have the means to handle 529 withdrawals to minimize the impact on financial aid.
– Instead of opening a 529 themselves, grandparents can contribute to a 529 plan owned by the parent company, which reduces eligibility for financial assistance as needed until they reach the end of the year. 5.64% of the net asset value.
– Grandparents can open an account and benefit from any tax deduction for themselves. But when it comes time to withdraw the money, they can transfer the property to a parent. First make sure to check with the financial company that handles the 529 plan to confirm that you can change it and / or that there is no tax consequence in doing so.
– Families can use grandparents' money 529 last. FAFSA uses tax information from two years ago. Grandparents can wait until January 1 of the second year to participate in a distribution. This will not affect FAFSA the following year, if it is assumed that students graduate in four years, says Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com . , a site created to help families understand 529 plans.
Kantrowitz said that if it took a five-year-old student to graduate, grandparents could wait until January 1 of the first year to get a distribution. In a recent online discussion, I invited Kantrowitz to answer questions on 529 shots.
Q: My in-laws make 529 contributions for my three children. At some point, my in-laws will disappear and I hope it will last a long time after the end of my children. But if it's before university, should my husband and I do something to ensure that children have access to these funds?
Kantrowitz: A 529 plan has an account holder and a beneficiary (the child). There are three typical scenarios involving grandparents and 529 plans:
– The grandparent is the account holder and the grandchild is the beneficiary.
– The parent is the account holder and the grandchild is the beneficiary.
– The grandchild is the account holder (deposit account) and the beneficiary, the grandparent playing the role of guardian until the grandchild reaches the age of majority.
If the grandparents are the account holders, ask them if they have appointed a successor owner in case they die. If this is not the case, suggest that they name you or designate your spouse as their successor.
Q: If grandparents own a 529 account and transfer ownership to parents to reduce the effect on assistance, does that count as taxable income for parents for this year?
Kantrowitz: Generally, an account holder change or a rollover of a 529 plan is excluded from income at the federal level. At the state level, it depends on the law of the state. Some states consider switching to a 529 regime outside of the state as an unskilled distribution, which will subject the earnings part to an income tax at the beneficiary's rate plus an income tax. 10% tax penalty and recovery of the state tax benefits. It is therefore preferable to go from a 529 plan owned by grandparents to a 529 plan belonging to a parent company in the same state as the 529 plan belonging to grandparents.
Singletary: I understand the concern over how the FAFSA rules deal with the distributions of the 529 plans held by the grandparents. Many are wondering whether it is worthwhile to fund $ 529 for their grandchildren. They worry that they are interfering with free money.
However, if the alternative is not to save, it has no financial meaning. Much of the needs-based help comes in the form of loans. And, as I've said many times, most students do not get enough scholarships – based on need or merit – to make a full journey to university. So there will be a void, and the savings in a 529 plan can help fill it.