Grandparents can often find themselves in a better financial position to save for their grandchildren’s education than their own children are. The parents of prospective students may still be contending with competing priorities like their own student loans, high-interest credit card debt, or a hefty mortgage.
One way to help save for a grandchild’s college education is by contributing money to a 529 savings account, an account where funds can be saved or invested and are withdrawn to be used exclusively for college-related expenses.[1] What else should grandparents know about 529 college savings accounts?
Grandparent-Held 529 Accounts Won’t Increase the Expected Family Contribution
Every family who fills out the Free Application for Federal Student Aid (FAFSA) receives an “expected family contribution” (EFC) calculation. The EFC is designed to measure how much the family can afford to pay per year for the child’s college education; the lower the EFC, the more need-based aid may be available. While parent-held 529 college savings accounts will count as an asset for EFC purposes, grandparent-held 529 accounts don’t; this may allow the child to be eligible for more financial aid than they would be if the account was held by a parent.1
An Income Tax Deduction May Be Available
More than 30 states (and the District of Columbia) offer a state income tax deduction or credit for contributions to a 529 account (even one that is owned by someone else, such as the child’s parent).2 This means that if a grandparent contributes $5,000 to their grandchild’s 529 in a given tax year, they can receive a tax credit of anywhere from a few hundred dollars to $1,000 or more, depending on the state’s tax treatment. For those who are looking to reduce their tax rate while helping the next generation, contributing to a 529 can be a good means by which to do so.
529 Plans are Fungible
One relative disadvantage of 529 plans is that they can only be used on educational expenses—similar to how a Health Savings Accounts can only be used for healthcare expenses. But even if a 529 beneficiary opts out of college, that doesn’t mean these funds are wasted. Grandparents can easily designate an additional (or substitute) beneficiary and use these funds to pay for that person’s educational expenses instead.
The same principle holds if the first beneficiary doesn’t use all the funds in their 529. Any leftover funds can be directed to other family members simply by adding them as a beneficiary. Grandparents may therefore opt to simply contribute funds to one general 529, adding grandchildren as beneficiaries shortly before they begin college.
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