Parents aren’t the only ones who save for college in a 529 plan. Grandparents are typically the next in line to save for a child’s education. And it’s a smart move with plenty of financial advantages, from gift tax breaks to estate planning and more. Here are the top 4 reasons grandparents should open a 529 plan to help their grandkids save for college.
1. Gift tax breaks
All 529 contributions are considered gifts. Starting in 2023, anyone can gift up to $17,000 per beneficiary without having to file a gift tax return. And this amount doubles for married couples filing jointly. The good news is even if you exceed the annual exclusion amount, you most likely won’t pay taxes. Any amount gifted over the annual exclusion can be deducted from your lifetime estate and gift tax exemption – $12.9 million in 2023.
Although there are no federal tax deductions for saving in a 529 plan, there could be other tax savings depending on where you live. Several states offer tax deductions, especially for residents who contribute to their state-owned 529 plan.
2. Room to give big
A special rule in the Internal Revenue Code allows anyone to superfund a 529 account up to five times the annual gift tax exclusion – $85,000 per beneficiary in 2023 or $170,000 for married couples filing jointly. Your lump sum is treated as if you’re giving the money evenly over five years, so your lifetime estate and gift tax exemption isn’t reduced. In order to superfund a 529, you would need to file a gift tax return, Form 709.
3. Tool in estate planning
Because 529 contributions are considered completed gifts and no longer part of an estate, they’re excluded from federal estate tax. Owning a 529 account allows grandparents to move finances out of their estate while still retaining control of the assets.
4. Lenient FAFSA reporting
One of the drawbacks of non-parental 529 accounts has been the potential impact on student financial aid. For a long time, students have been required to report distributions from 529s owned by grandparents (or other family) as untaxed student income. But that’s going away.
Beginning October 1, 2023, for the 2024-2025 academic year, the FAFSA will no longer count grandparent-owned 529 distributions against the student. This is a major change and a big incentive for grandparents to open a 529 account.
A new, upward trend
We’ll no doubt see a rise in 529 accounts owned by grandparents, especially with the new FAFSA change. College savings is an exercise the whole family can participate in, and grandparents can be a big part of helping their grandkids prepare for the future.
Grandparents interested in opening a 529 account should consult a financial planner to find the best fit. Most states offer a traditional 529 savings plan, while a few have a prepaid option. There’s also a prepaid plan designed to make private college more affordable with no state residency requirements called Private College 529 Plan, offered by CollegeWell. Find more details here.
Investopedia. “How to Make 529 Plan Contributions as a Gift, https://www.investopedia.com/how-to-make-529-plan-contributions-as-a-gift-5205866.”
How to Pay for College. “How Much Can You Contribute to a 529? https://howtopayforcollege.com/blog/how-much-can-you-contribute-to-a-529/.”
CollegeWell. “Private College 529 Plan Details. https://www.collegewell.com/private-college-529-plan/plan-details/.”