Opinion: The locks are open to grandparents for large college savings for grandchildren

If you’re a grandparent trying to save the day by helping your grandchildren pay for college, take a second look at a tax-advantageous 529 college savings plan before the end of the year.

Changes to the rules for federal financial aid calculations in 2023 mean that new investment opportunities are open for family members to help out without hurting financial aid.

Funding the huge cost of college can be tricky when you go beyond the nuclear family. Not all generations have the same level of wealth and their ups and downs don’t always line up when it counts for financial aid calculations. You may want to start saving when a baby is first born, for example, but you have no idea what the extended family’s financial situation will be 17 years later.

Financial planner William Bevins constantly talks to grandparents who say they want to help but don’t know the best way.

“It’s like anything else that deals with taxes – we need to make sure we consider all of our options,” says Bevins, who is based near Nashville, in the Tenn.

Ascensus, a 529-floor administrator, does not officially track the relationship between the account holder and the beneficiary, but his data shows a correlation indicating a small bump of grandparents versus purported parents.

Ascensus data also shows that the flow of ownership hasn’t changed since 2011 and that grandparents with financial advisors tend to open more accounts than those who do it on their own.

Parent vs grandparent account ownership

Source: Ascenso

College funding takes a village

Existing advice on grandparents opening 529 college savings accounts – or really any investment, custody, or otherwise – comes with a huge caveat: Any money from a non-parent given to a student while eligible for help can count as student income and is valued at a much higher rate than parental wealth. Doing it right requires communication.

Let’s say you gave $ 5,000 to a high school graduate in May 2022. They should report it as income on Free Application for Federal Student Aid (FAFSA) this year – for their second aid package – and the likely outcome is that the college lowers its award by $ 2,500. If the parent reported a savings of $ 5,000, however, the college would only subtract 5.6%, or $ 280, to use for tuition.

Some families have avoided this by waiting to use the money of their grandparents and other relatives until after the second year, when they exceeded the reporting obligations. But it will not be necessary to strategize starting from the FAFSA for the academic year 2024-2025 (compiled in autumn 2023), when students will no longer have to declare external financial contributions.

So starting now for next year, “grandparents can use 529s and start leveraging them for wealth planning,” says Robert Farrington, founder of The College Investor.

One caveat remains: this only applies to the FAFSA, and some schools use a secondary financial aid report called the CSS Profile, which may still ask for outside contributions and treat them as student income.

Tax breaks for grandparents

The most immediate tax advantage of contributing to a 529 plan is on current year state taxes if you live in one of the 30+ states and the District of Columbia that offers a direct deduction. An additional incentive to contribute by the end of this year is that since both SPX titles,
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and TMUBMUSD10Y bonds,
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are still falling, you will start your account by purchasing at low prices.

The main long-term benefit is tax-free growth as long as you use the funds for qualified education expenses (or face a 10% penalty and growth tax). The estate planning aspect comes into play for those who are able to make a major contribution, up to five years times the IRS annual donation limit. For a couple of grandparents, this equates to $ 160,000 per grandchild in 2022 ($ 170,000 in 2023).

Grandparents with young grandchildren will be the most interested in changing the rules, because you get the most out of your tax-free growth when you start early and let it mature over the years. For those who have already dealt with this problem with older children, Bevins thinks they will feel free from restrictions.

“It will make some grandparents want to finance more than they have in the past. They will see this gift as fully accessible and fully appreciated, whereas before they were penalized, ”she says.

529 versus other options

While some savers don’t like the look of 529s freezing money for educational uses, the accounts are actually quite flexible. If you have grandchildren across ages, you can transfer money from one beneficiary to another at your discretion or use it for private tuition. You can save now for babies who are yet to be born and name them on the account when they arrive. For grandchildren who have already graduated, you can help them pay up to $ 10,000 each in loans, such as your personal student loan amnesty program. You can also use the money for yourself if you take a class that qualifies.

However, there are other options for saving without these parameters. Ascensus says some grandparents have told them they don’t want to take on the job of owning a college savings account and just prefer to give money. So far, in 2022, Ascensus has turned over $ 250 million into 529 through its Ugift program, with nearly $ 2.7 billion donated since the feature’s launch in 2007.

Grandparents can save directly for a minor in a custodial account, usually with a bank or brokerage firm, but be aware of the rules whereby these accounts are handed over to the beneficiary at the age of majority, which in some cases can be 18 years old . UNest is a service that helps families create these accounts, primarily for parents, but with an easy gift option for relatives. The average balance for UNest accounts is $ 700 and the average gift amount is $ 80, says Ksenia Yudina, CEO of UNest Advisors. This is compared to over $ 25,000 for 529, according to the College Savings Plans Network.

“We see a lot of grandparents giving around Christmas, birthdays and Halloween,” says Yudina.

Grandparents can also simply save in a brokerage account, commercial tax benefit for flexibility. But one final consideration is that in most plans, there’s no limit to how long you need to keep the money in a 529 account before spending it, so you can wait and at least get a state tax deduction if you’re eligible.

More from MarketWatch

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