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A qualified tuition plan, more commonly known as a 529 savings plan, is a tax-advantaged savings plan that helps people save for future college costs. Starting a 529 savings plan is the preferred method of college savings for many Americans, and they can be opened by anyone, not just the parents of future students. That means that you can save for your grandchildren, nieces, nephews, or any children in your life.
We recently talked about grandparents who want to help grandkids pay for college, and the concern that sometimes gifting money to grandkids that is meant for college doesn’t necessarily get used for college costs. A 529 savings plan is a great solution to that potential problem, because the money from the plan needs to be used for college-related costs, such as tuition, fees, books, supplies, room and board, and equipment. If the money from a 529 savings plan isn’t used for college expenses, it will be subject to income tax as well as a 10% federal tax penalty on any earnings it has accrued.
Despite the up sides to 529 savings plans for grandchildren, there are some ways that such savings accounts could negatively affect financial aid. Although the contents of a grandparent’s 529 savings plan may not be considered when calculating a grandchild’s FAFSA, the distributions from the account will affect future FAFSA assessments.
Example of a 529 Savings Plan in Action
Going back to our friends the Jacksons, let’s say that Norma Jackson opened a 529 plan for her granddaughter, Stephanie. The account currently contains assets valued at $50,000. Stephanie can file her FAFSA in January of 2015, as she’s planning to begin college in the 2015-2016 school year. She receives some need-based financial aid, but then Norma withdraws $10,000 from the 529 plan to cover the remaining cost of Stephanie’s college expenses. When Stephanie files her FAFSA in January 2016 for the 2016-2017 school year, that $10,000 from the year prior will be calculated as part of her EFC (expected family contribution), because that’s how much her family contributed the year before.
To decide if a 529 savings plan is right for you and your grandchildren, contact a tax professional at DeFreitas and Minsky LLP today! Call us at (516) 746-6322 for answers to all your tax-related questions!
