ST. CROIX INSIGHTS

A Tax-Smart Way to Support Grandkids’ Education

BY BRETT ANDERSON/ST.CROIX ADVISORS, LLC
grandchildren fishing with their grandfather

While the Section 529 plan is commonly known as a tax-favored method for parents to save for their children’s college education, older family members can also utilize this strategy to support their grandchildren’s educational endeavors. Setting up an account for your grandkids can offer similar tax benefits to those funded by parents.

Understanding the 529 Plan Options

A 529 plan can be established as either a prepaid tuition plan or a college savings plan.

529 Prepaid Tuition Plan:

  • Locks in Tuition Rates: Allows you to prepay tuition at participating colleges or universities at today’s rates, protecting against future tuition inflation.
  • State-Sponsored: Typically sponsored by state governments, and the benefits may be limited to in-state public colleges.
  • Limited Flexibility: Usually limited to covering tuition and mandatory fees, with less flexibility in using funds for other qualified expenses.
  • Risk Mitigation: Provides a hedge against rising tuition costs, as you’ve already paid for tuition at the locked-in rate.

529 College Savings Plan:

  • Investment Option: Allows you to invest contributions in various investment options, such as mutual funds, stocks, or bonds, chosen by the account owner.
  • Flexibility: Funds can be used for a broader range of qualified higher education expenses, including tuition, room and board, books, and even certain technology expenses.
  • No Guarantees: No guarantees on investment returns or tuition rates, as the account’s value is subject to market fluctuations.
  • Nationwide Participation: Available in all states, and beneficiaries can use the funds at any eligible educational institution, not limited to specific states.

Getting Started and Maximizing Benefits

Upon setting up a 529 plan, you designate your grandchild as the beneficiary and make contributions within generous limits imposed by the state. These contributions are then invested based on the offerings available for the specific plan. Starting early allows for potential tax-free growth of earnings within the account, providing substantial assistance towards your grandchild’s educational expenses.

Tax Benefits and Flexibility

Qualified distributions from a 529 account are exempt from federal income tax and often from state income tax as well. If the grandchild doesn’t utilize the entire balance for education, you have the option to roll over the remaining funds tax-free to another beneficiary’s account, such as another grandchild. Setting up multiple 529 accounts for multiple grandchildren can be beneficial, especially if they are close in age.

Enhancements to Financial Aid Eligibility

Previously, distributions from a grandparent’s 529 plan were factored into the expected family contribution (EFC) for federal financial aid, potentially reducing aid eligibility. However, under the FAFSA Simplification Act, students no longer need to report contributions from a grandparent’s 529 plan on the FAFSA form, enhancing the likelihood of qualifying for financial aid.

Maximizing Gift Tax Exclusions

Contributions to 529 accounts count as gifts but can be offset by the annual gift tax exclusion. In 2024, the exclusion is $18,000 per gift recipient. Additionally, a lump-sum contribution to a 529 account allows for claiming five gift tax exclusions, enabling substantial contributions without tax consequences.

Summarizing the benefits of a 529 Plan:

  • Tax Benefits: Contributions are exempt from federal and often state income tax.
  • Flexibility: Unused funds can be rolled over to another beneficiary’s account.
  • Early Start: Starting early allows for potential tax-free growth of earnings within the account.

Important Considerations

It’s essential to note that on the new FAFSA form, the student’s income is based on data from federal income tax returns supplied by the IRS.

By leveraging a Section 529 plan, you can play a significant role in supporting your grandchildren’s educational journey while enjoying tax benefits and financial flexibility.

 

While the Section 529 plan is commonly known as a tax-favored method for parents to save for their children’s college education, older family members can also utilize this strategy to support their grandchildren’s educational endeavors. Setting up an account for your grandkids can offer similar tax benefits to those funded by parents.

Understanding the 529 Plan Options

A 529 plan can be established as either a prepaid tuition plan or a college savings plan.

529 Prepaid Tuition Plan:

  • Locks in Tuition Rates: Allows you to prepay tuition at participating colleges or universities at today’s rates, protecting against future tuition inflation.
  • State-Sponsored: Typically sponsored by state governments, and the benefits may be limited to in-state public colleges.
  • Limited Flexibility: Usually limited to covering tuition and mandatory fees, with less flexibility in using funds for other qualified expenses.
  • Risk Mitigation: Provides a hedge against rising tuition costs, as you’ve already paid for tuition at the locked-in rate.

529 College Savings Plan:

  • Investment Option: Allows you to invest contributions in various investment options, such as mutual funds, stocks, or bonds, chosen by the account owner.
  • Flexibility: Funds can be used for a broader range of qualified higher education expenses, including tuition, room and board, books, and even certain technology expenses.
  • No Guarantees: No guarantees on investment returns or tuition rates, as the account’s value is subject to market fluctuations.
  • Nationwide Participation: Available in all states, and beneficiaries can use the funds at any eligible educational institution, not limited to specific states.

Getting Started and Maximizing Benefits

Upon setting up a 529 plan, you designate your grandchild as the beneficiary and make contributions within generous limits imposed by the state. These contributions are then invested based on the offerings available for the specific plan. Starting early allows for potential tax-free growth of earnings within the account, providing substantial assistance towards your grandchild’s educational expenses.

Tax Benefits and Flexibility

Qualified distributions from a 529 account are exempt from federal income tax and often from state income tax as well. If the grandchild doesn’t utilize the entire balance for education, you have the option to roll over the remaining funds tax-free to another beneficiary’s account, such as another grandchild. Setting up multiple 529 accounts for multiple grandchildren can be beneficial, especially if they are close in age.

Enhancements to Financial Aid Eligibility

Previously, distributions from a grandparent’s 529 plan were factored into the expected family contribution (EFC) for federal financial aid, potentially reducing aid eligibility. However, under the FAFSA Simplification Act, students no longer need to report contributions from a grandparent’s 529 plan on the FAFSA form, enhancing the likelihood of qualifying for financial aid.

Maximizing Gift Tax Exclusions

Contributions to 529 accounts count as gifts but can be offset by the annual gift tax exclusion. In 2024, the exclusion is $18,000 per gift recipient. Additionally, a lump-sum contribution to a 529 account allows for claiming five gift tax exclusions, enabling substantial contributions without tax consequences.

Summarizing the benefits of a 529 Plan:

  • Tax Benefits: Contributions are exempt from federal and often state income tax.
  • Flexibility: Unused funds can be rolled over to another beneficiary’s account.
  • Early Start: Starting early allows for potential tax-free growth of earnings within the account.

Important Considerations

It’s essential to note that on the new FAFSA form, the student’s income is based on data from federal income tax returns supplied by the IRS.

By leveraging a Section 529 plan, you can play a significant role in supporting your grandchildren’s educational journey while enjoying tax benefits and financial flexibility.