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A Grandparents Guide to 529 Plans

August 28, 2018

 

 

How to make the most of your gift.

 

Helping a grandchild with college expenses is a very satisfying way to use some of your discretionary funds. It is wise to discuss college planning with the grandchild’s parents before embarking on a college savings plan. The most efficient and flexible means to accomplish this is through a program called a 529 Plan. The main benefit is that the money invested in these plans grows tax-deferred and distributions are tax-free, as long as they are used for educational purposes (K through 12 and/or college).

 

There are several points to be aware of when making this investment:

 

The grandparent should OWN the 529 plan, and the grandchild should be named as the BENEFICIARY.

When a grandparent owns the 529 plan, the asset is not counted as owned by either the student or the parent, and therefore will not reduce any financial aid available to the student.

 

However, when the funds are distributed to the student, the money counts as income to the student on their tax return and can impact potential financial aid. Financial aid applications (called FAFSA) reference the student’s tax return of two years prior. It is best to distribute the grandparent’s 529 funds to the student in his/her last two years of college if financial aid is in play. This is so the income will not be used in financial aid application and award decisions.

 

The designated beneficiary can be changed by you at any time to another family member.

This includes children, parents, spouses, siblings, first cousins, nieces & nephews, aunts & uncles. If the originally named beneficiary does not attend college, you can change the beneficiary to another grandchild and/or family member.

 

There are dozens of different 529 plans, each sponsored by a different state.

For grandparents who are California residents, we have found that the Utah 529 plan is the best choice. They have a wide variety of low-cost Vanguard funds including age-based funds that automatically rebalance the account assets to be more conservative as the child approaches high school graduation.

 

Do your research and determine which one is right for you.

 

We recommend using the gift tax exclusion amount each year to fund the 529 plan.

At present, that amount is $14,000 per recipient.

 

Feel free to reach out and let us know if you would like help in establishing a 529 savings plans for your grandchildren.


 

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