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Having a 529 account in a grandparent’s name rather than the parent’s name can offer several strategic advantages when it comes to financial aid and other considerations. Hi, I’m Alex Wolfe, Certified Financial Planner and Head of Financial Planning at Base Wealth Management. Do you have a 529 plan set up or are considering opening one? Well, you’re going to want to stick around.
1. Impact on Financial Aid, FAFSA Considerations: When the 529 account is held in the parent’s name, it is considered a parental asset and up to 5.64% of its value is factored into the student’s financial aid calculation. However, withdrawals from the account count as untaxed income to the student, which could reduce financial aid and eligibility by up to 50% of the withdrawn amount.
2. Grandparent-Owned 529: Until recent changes, distributions from a grandparent-owned 529 were counted as student income on FAFSA, impacting financial aid. However, recent updates to FAFSA no longer consider these distributions as taxable income, making grandparent-owned 529 plans more attractive since they don’t affect financial aid eligibility in the same way.
3. More Control for the Grandparents: Flexibility is important. Grandparents can retain control of the funds and decide when and how to disperse them for educational purposes, allowing for greater flexibility in managing family assets and strategic gifting.
4. Financial Planning Benefits – Gift Tax Exclusions: Grandparents can contribute to a 529 plan to reduce their taxable estate. They can take advantage of the annual gift tax exclusion, which is currently $17,000, and contribute up to five years worth of exclusions up front to super fund the 529.
5. Tax Advantages – State Tax Deductions: In some states, they offer tax deductions or credits for 529 contributions. If a grandparent resides in a state that provides such incentives, contributing to the plan could offer additional tax benefits.
6. Less Impact on the Parents: Keeping the 529 account in the grandparent’s name allows the parent to preserve their own financial resources for other priorities, such as retirement or unexpected expenses.
7. Strategic Distribution and Timing Post-Graduation: Due to recent FAFSA regulation changes, grandparent-owned 529 funds can be used for later years of college, reducing any potential financial aid impact. Using those funds after the student has already filed their last FAFSA ensures that distributions won’t affect financial aid eligibility.
In summary, a grandparent-owned 529 account can help mitigate financial aid impacts, offer estate tax planning benefits, provide tax advantages, and give grandparents more control over the education funding. I’m Alex Wolfe, Certified Financial Planner. If you found this insightful, we have more content on our website at basewealthmanagement.com. We’ll see you on the next one.
