According to a recent survey by the College Savings Plans Network, the average balance of 529 plans as of December 31, 2021 was $ 30,652. But is that an adequate amount? Most student tuition and housing costs will be much higher than for four years of college ($ 43,755 per year for a private school and $ 11,631 per year for state residents in public colleges) and many students will have to rely on a combination of savings and financial aid to pay for some or all of these costs.
If you’re looking to save money on your grandchildren’s education without jeopardizing their eligibility for aid, some recent changes in 529 plans will make it easier.
Streamlining the application process is in the works
Good news: The government is working to streamline the FAFSA (Free Application for Federal Student Aid) application process, as part of a bill that was converted into law in December 2021.
Some of the changes are phased in over several calendar years. We can expect to see a new simplified FAFSA form in October 2022. Some changes have come into effect for award year 2021-22, while other changes will not be fully implemented until award year 2024-25.
Distributions from your 529 will no longer reduce your grandson’s financial help
In the short term, there is a welcome change that grandparents can start taking advantage of for financial planning purposes.
Under the old FAFSA rules, students were required to report distributions of grandparents-owned 529 savings plans as untaxed student income, which had the potential to reduce a student’s aid eligibility by up to half the amount distributed by the plan college savings.
In other words, a $ 15,000 distribution from a grandfather’s 529 plan could reduce aid eligibility by $ 7,500. This led some families to do complicated planning, in which grandparents would delay 529 distributions until the grandson had been in the final years of college to avoid potential pitfalls to financial aid eligibility.
Fortunately, with the FAFSA simplification come new rules on how grandparents’ assets are treated 529. The new rules, in force for the school year 2023-2024will no longer count grandparent-owned college 529 savings plan distributions as untaxed student income and will not negatively impact aid eligibility.
But now grandparents can take advantage of the new 529 rules. Why? FAFSA looks back on two previous years of a student’s tax return.
If you want to keep control of your college savings for one or more grandchildren, you can now do so without having to worry about it damaging their eligibility for financial aid. And you can say goodbye to the complexities of planning distributions in future calendar years to avoid potential problems.
Five-year superfunding of donations in one
One benefit of the 529 plans that many people are unaware of is that they allow a contributor to fund five years of tax-free donations in a single calendar for a beneficiary. You can normally give $ 16,000 a year as a gift using the annual gift tax exclusion amount. With a 529 you can gift $ 80,000 in a year (or $ 160,000 if a marriage applies jointly) and avoid gift taxes. You can only do this every five years, but this strategy offers some great planning opportunities.
An added benefit for wealthy families is that 529s can remove assets from your property allowing you to retain control over them. A 529 savings plan is a great vehicle for accelerating savings and maintaining tax efficiency.
529 college savings plans continue to be popular vehicles for college savings. Business growth and earnings in these plans are tax free as long as future distributions of money are used for qualified educational purposes, including things like tuition, textbooks, and computers.
With the new FAFSA changes, it is a great opportunity for grandparents to review their savings plan.
Halbert Hargrove Global Advisors, LLC (“HH”) is a SEC registered investment advisor based in Long Beach, California. Registration does not imply a certain level of skill or training. More information about HH, including registration status, rates and services, can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or to provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified lawyer and accountant. All views or opinions reflect the author’s judgment as of the date of publication and are subject to change without notice. All information presented here is believed to be accurate at the time of writing, but no guarantee is given as to its accuracy and no liability is accepted for any errors or omissions.
Wealth Advisor and Director of Information Technology / Security, Halbert Hargrove
Shane W. Cummings is based in Halbert Hargrove’s Denver office and holds various roles with Halbert Hargrove. As Director of Information Technology / Security, Shane’s primary goal is to enable Halbert Hargrove employees to work efficiently and effectively while safeguarding customer data. As an asset adviser, he works with clients helping them set goals and identify financial risks, creating an allocation strategy for their investments.