Beginning in 2023 there is a new way to save money for
college that won’t impact your student’s ability to qualify for financial
aid. This change is in the 529 college saving program and is a change that
every parent, grandparent, or friend of a future scholar should know.
Simply
put, grandparents can now open up 529 savings plans without hurting the
student’s ability to get financial aid!
Background
529
college savings plans provide a way to contribute after-tax money into an
account designated for a beneficiary (the student). The plan is controlled
by the account holder on behalf of the student, so there is little risk
that the funds won’t be used as intended for education. As the deposits
grow over time, any gains on the deposits are tax-free as long as they are
used for qualified educational expenses. Even better, these funds can be
used for both college and K through 12 qualified expenses. Funds not used
for education will be subject to ordinary income taxes AND a 10% penalty.
The problem
While
anyone can open a 529 savings plan for a future student, any time a
distribution was made to the student from a non-parent account, that
distribution used to be treated as untaxed income to the child. Up to 50%
of this distribution could impact the student’s ability to receive other
aid through the Free Application for Federal Student Aid (FAFSA). On the
other hand, if the account is in the parent’s name, the reduction in aid
eligibility is maxed out at 5.64%!
The new opportunity
It
appears now that a grandparent (or potentially any non-custodial parent or
friend) can open up a 529 savings plan without it hurting the future
student’s ability to get federal aid. In the eyes of the new FAFSA, this
funding is now virtually invisible to them as they calculate a student’s
financial needs because they are no longer asking the questions about the
grandparent’s contributions. So not only will the assets in the 529 account
be ignored, but the distributions from the 529 account will also not
influence the FAFSA results.
Considerations
If
you are considering this option to help fund the ever-increasing cost of
college, here are some considerations and ideas:
·
Let
grandparents know of the change. Consider having your parent set up an account for the
benefit of your child (their grandchild). Then put their gifts into the
account, instead of giving cash to your child. Remember, they can
contribute up to the gift threshold limit each year (currently $17,000 per
person in 2023) or even more with special funding rules.
·
No
college? No problem.
If your grandchild does not go to college and there isn’t a need to fund K
through 12 education, you can change the beneficiary to another grandchild
or family member.
·
Need
to pull the money. If
you need to pull the money, remember that the original contributions are
tax and penalty free. Taxes and penalties only apply to earnings in the
account that are distributed.
·
Consider
other applications.
If the student goes to a private school, these grandparent contributions
may need to be disclosed, so plan accordingly.
Given
the ever-increasing cost of college, now is a great time to have more
advocates helping to save for future educational expenses. These extra
savings could make a big difference in reducing your student’s future debt
obligations.
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