September is here and that means one thing – it’s back to school time! Whether COVID-19 has your grandkids going back to school virtually or in-person this year, one thing remains the same, how do they pay for it? One great way would be utilizing a 529 College Savings Plan. A 529 College Savings Plan is basically what its name implies – a college savings plan, and it can be owned by a student, their parent, or anyone else, such as a grandparent.
529 Plans are a great gift to give to your grandchild – a college savings account that allows for tax free growth! If you are contributing to a 529 plan, you may also qualify for certain tax credits or subtractions, depending on your state of residence. 529 plans are flexible and a great vehicle for family giving because you can contribute as much as you want, when you want.
We already know funds from a 529 plan can be used to pay any qualified college expenses, tax & penalty free. Typically, when the plan is owned by the dependent student or their parent, it’s counted as a parent asset on the Free Application for Federal Student Aid (FAFSA) and distributions are ignored as determination of aid eligibility. However, when the plan is owned by a grandparent, it is NOT reported as an asset on the FAFSA. Instead, any distributions made from the plan to pay qualified college expenses count as untaxed income to the beneficiary (or student). If you are a grandparent who owns a 529 plan for your grandchild, this is something that you should be aware of, as it can negatively affect your student’s financial aid award. One great work-around would be delaying any distribution from the 529 plan until the student’s Spring Semester of his/her Sophomore year. Why? FAFSA has a 2-year lookback for income and tax information, so by the time the student would need to report that distribution, they would likely be graduated. Another work-around would be waiting until after graduation and using the plan to pay down student debt – up to a $10,000 lifetime limit.
Grandparent-owned 529 plans are a great way to help your grandkids save for college. If you have any questions on how these distribution techniques can benefit your student, call our office at 320-222-4236 for a no-cost meeting today!