Grandma’s 529 Account Probably Better
January 23, 2008 By Debbie Dragon
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 Money withdrawn from a 529 account that is then used for tuition, books, room and board is withdrawn federal tax free.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.
Posted in children, college, family, financial plans, income, investing, parenting
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January 24th, 2008 at 7:28 am
Since each state has an altogether different 529 Plan tax benefits, and can vary depending on the contributor’s age, then I guess the issue of whether it is better for a parent to set up a 529 plan for their child’s college savings or a grandparent is debatable…
January 24th, 2008 at 7:29 pm
Hi Jay-
the tax benefits will vary- but federal financial aid rewards are determined by calculating the parents assets- so if the parents have the 529 account in their name that money will reduce the amount of financial aid a student qualifies for. If a grandparent has the account in their name however, it won’t affect the amount of financial aid they qualify for.
January 27th, 2008 at 11:22 pm
[...] This was an interesting question. Matt from American Consumer News asks who is better to contribute to a 529 account - parents or grandparents. Personally, I support my kids grandparents helping out with their education, however their are tax consequences to consider. Check out Matt’s post at Grandma’s 529 Account May Be Better. [...]
January 28th, 2008 at 8:49 pm
[...] “Grandma’s 529 Account Probably Better” at American Consumer News. My boyfriend’s whacky college savings plan is to give his parents legal guardianship of his children. I forget how this was supposed to help with college savings, but I think ACN’s idea is much better: use grandparents’ 529 plans to pay for college, since these won’t be factored into financial aid calculations. [...]
January 30th, 2008 at 9:13 am
[...] Grandma’s 529 Account Probably Better @ American Consumer News 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. [...]