Grandma’s 529 Account Probably Better

January 23rd, 2008 • Related • Filed Under • by Debbie Dragon

529 Which is better: a parent who sets up a 529 plan for their child’s college savings or a grandparent?

A 529 Plan is a college savings plan operated by each state. The specifics of the savings plan will vary depending on how the state you live in has set it up, but the idea is the plan allows you to save for college with special tax benefits.

It comes down to financial aid programs. When the child is ready to apply for financial aid for college, there are certain accounts that will play a role in the child’s eligibility for financial aid and other accounts that do not effect the amount of financial aid awarded. If a parent had opened a 529 account for a child, that money is then used when the financial aid award is determined- but when a grandparent opens a 529 account for their grandchild, that money is not calculated in the eligibility for financial aid assistance.

Financial aid calculations almost always use 12% of parental assets as ‘available’ for paying educational expenses. So, if a parent has a 529 account, it is factored into the decision.

When it comes to withdrawing the funds for a 529, there are no extra advantages for parents or grandparents- but there are really no disadvantages either! Money withdrawn from a 529 account that is then used for tuition, books, room and board is withdrawn federal tax free.

What should be considered when deciding whether it’s better for a grandparent to open a 529 account or the parent; is what potential tax breaks are available for either party within the state they live in. Each state has slightly different 529 Plan tax benefits, and can vary also by contributor’s age.

Some states allow contributors over the age of 70 to deduct the full amount of 529 contributions on their tax returns, while a younger contributor will have a maximum contribution limit for deductions.