The floodgates are open to grandparents to save on college for grandkids

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 highs and lows don’t always line up when it counts for financial aid calculations. You may want to start saving as soon as a child is born, for example, but you have no idea what the extended family’s financial situation will be 17 years later.

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

“It’s like anything else that deals with taxes — we have to make sure we’re looking at all of our options,” says Bevins, who is based near Nashville, Tenn.

Ascensus, an administrator of 529 plans, does not officially track the relationship between account holder and beneficiary, but its data shows a correlation that indicates a small bump of grandparents compared to alleged parents.

Data from Ascensus also shows the flow of ownership hasn’t changed since 2011, and grandparents with financial advisers tend to open more accounts than those who do it themselves.

Parent vs Grandparent Account Ownership

College funding takes a village

Existing advice on grandparents opening 529 college savings accounts – or really any investment, custodial or other account – comes with a huge caveat: Any money from a non-parent given to a student while eligible for aid may be considered student income and is assessed at a much higher rate than parental asset. To do things well, you have to communicate.

Say you gifted $5,000 to a high school graduate in May 2022. They’re supposed to report it as income on the Free Application for Federal Student Aid (FAFSA) this year – for their second aid program – and the likely outcome is that the college reduces its scholarship by $2,500. If the parent reported savings of $5,000, however, the college would subtract only 5.6%, or $280, to be used for tuition.

Some families avoided this by waiting to use money from grandparents and other family members until the end of the second year, when they exceeded their reporting obligations. But strategizing will no longer be required starting with the FAFSA for the 2024-2025 academic year (completed in fall 2023), when students no longer have to report outside financial contributions.

So, starting now for next year, “grandparents can use 529s and start leveraging them for estate 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 about outside contributions and consider them student income. .

Tax benefits for grandparents

The most immediate tax benefit of contributing to a 529 plan is for your current year state taxes if you live in one of more than 30 states and the District of Columbia that offers a direct deduction. An additional incentive to contribute before the end of this year is that since the two SPX stocks,
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The main long-term benefit is tax-free growth as long as you use the funds for eligible educational 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 gift limit. For a pair of grandparents, that’s $160,000 per grandchild in 2022 ($170,000 in 2023).

Grandparents with young grandchildren will be most interested in the rule change, as you get the most tax-free growth when you start early and let it accumulate over the years. . For those who have experienced this before with older children, Bevins thinks they will feel free of any restrictions.

“It will encourage some grandparents to fund more widely than they have in the past. They will see this gift as being fully accessible and fully valued, whereas before they were penalized,” he says.

529s vs other options

While some savers don’t like the look of 529s that lock money for educational purposes, the accounts are actually quite flexible. If you have age-split grandchildren, you can transfer money from one beneficiary to another at your discretion, or use it for private school tuition. You can save now for unborn babies and name them on the account when they arrive. For grandchildren who have already graduated, you can help them repay up to $10,000 each in loans, like your own personal student loan forgiveness program. You can even use the money for yourself if you take a qualifying class.

But, there are still other options to record without these settings. Ascensus says some grandparents have told them they don’t want to take on the work of owning a college savings account and would rather just give the money away. So far in 2022, Ascensus has processed over $250 million in 529 through its Ugift program, with nearly $2.7 billion offered since the feature launched in 2007.

Grandparents can save directly for a minor in a custodial account, usually at a bank or brokerage firm, but be aware of the rules that these accounts are released to the beneficiary at the age of majority, which may be 18 in some cases. UNest is a service that helps families create these accounts, primarily for parents, but with an easy donation option for loved ones. The average UNest account balance is $700 and the average donation amount is $80, says Ksenia Yudina, Managing Director of UNest Advisors. That compares to more than $25,000 for the 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, trading a tax advantage for flexibility. But one final consideration is that in most plans, there’s no limit on how long you have to keep the money in a 529 account before spending it, so you can wait and at least get a deduction. state tax if you are eligible.

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