College is expensive, and with the cost rising each year, parents may be required to pivot when it comes to their own finances in order to support their children’s education. In the same vein, grandparents may be eager to support their grandchildren’s futures, specifically from retirement. One popular avenue for this support is the 529 college savings plan.
These plans may offer significant tax advantages and can be a powerful tool for building a nest egg when it comes to higher education. But is a 529 plan truly the best way for grandparents to help their grandkids? We’ll explore the pros and cons of this approach for grandparents and how this could make a positive impact on their grandchildren’s education.
A 529 plan is a special savings account with tax benefits that helps you save money for education costs. Parents, grandparents, and other family members use this as a popular tool when it comes to saving for higher education.
Here’s how it works:
A 529 plan offers tax-deferred growth, meaning you don't have to pay federal taxes on any money it earns until you take it out. It also includes tax-free withdrawals, so long as the money you take out of your 529 plan is used for eligible education expenses, including tuition, room and board, and books.
While parents are often the most common users of 529 plans, this approach is a popular way for grandparents to support and contribute to their grandchildren’s education.
Yes, grandparents can open a 529 plan for their grandchildren. You maintain control of the account even with a grandchild as the beneficiary which gives you freedom to determine when to take a distribution or change beneficiaries.
A 529 plan is a useful tool for grandparents looking to support their grandchildren’s education. While there are pros like tax advantages and opportunities for investment growth, there are factors like the potential impact on financial aid to weigh against them.
Pros
Tax benefits: You may enjoy tax-deferred growth and tax-free withdrawals for qualified education expenses.
Maintain control: Keep ownership and control over your account, including investment choices and beneficiary changes.
Gift tax advantages: You may contribute substantial amounts without incurring gift taxes.
Estate planning: You may reduce your taxable estate through contributions to the plan.
Flexibility: Choose from various investment options to match your risk tolerance.
Cons
Potential impact on financial aid: Depending on the financial aid eligibility of your grandchild and the college—particularly private—there may be some implications (more on this below).
Penalties for non-qualified withdrawals: You may face penalties if the funds aren’t used for qualified education expenses.
Limited investment options: Compared to other plans, there may be fewer investment options.
Note that this is general knowledge, not financial advice for your situation. Please seek a financial advisor, tax advisor, or estate planning professional to discuss any specifics for your situation.
The landscape of 529 plans for grandparents has changed, improving the standing of 529 plans in regards to financial aid. Previously, distributions from a grandparent-owned 529 plan were considered part of a student's income. This could significantly reduce their financial aid eligibility.
But starting with the 2024 to 2025 academic year, grandparent-owned 529 plans no longer affect financial aid eligibility. This means grandparents can contribute to their grandchild's education without worrying about reducing their financial aid.
While this is great news for both grandparents and their grandchildren, there are important factors to consider. State-based financial aid rules may vary, and some states might still consider grandparent-owned 529 plans when determining eligibility. Also, private colleges may have their own policies and these institutions might have different criteria for giving financial aid. It’s always best to check with the specific schools your grandchild is considering for their policy and the most accurate information.
As a grandparent, you want what’s best for your grandchildren. That’s why selecting the best 529 plan for all parties requires careful consideration. You may prioritize your state of residence to capitalize on potential tax benefits and specific plan features. You may also align your investment choices with your grandchild's age and your risk tolerance.
While tax incentives are enticing, a holistic approach encompassing investment options, fees, and a reputable plan provider is important for making an informed decision that is right for you and your family.
Interested in learning more about how you as a grandparent can help your family without affecting all of your retirement? Consider attending one of our retirement seminars or webinars, hosted by experienced financial advisors who can assist with all your retirement planning needs.
Busy schedule? Don't want to leave home? Then these live instruction webinars are for you!
Join us in the classroom for live instruction on multiple topics related to your retirement future.
