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What Contributing Grandparents Need to Know about 529s
What exactly should grandparents need to know about 529 college plans? Some things just seem to go together like
hot dogs and baseball, peanut butter and jelly, and of course, grandparents and 529 plans. It’s a very lucky family
that can depend upon grandma and grandpa to help with college tuition bills. College expenses aren’t exactly
shrinking. The best gift that anyone could give could be your grandchild’s education fund and a 529 plan is a great
way to get started.
A 529 plan is a state sponsored savings plan that invests money on behalf of beneficiaries. The earnings are tax
deferred from federal income tax and most states have programs that will defer state taxes. If your grandchild uses
the money from this fund for any qualified education purpose, the withdrawals will be free of tax.
Grandparents are allowed to contribute up to $11,000 per year per grandchild. So if Grandpa and Grandma have two
grandchildren could place up to $44,000 in funds for the grandchildren without any gift tax liability. The
grandparents would each have to set up 2 funds for each grandchild (a total of 4). Grandparents will still have
control over these funds and can retrieve the money if needed. Of course, there will be taxes and penalties on an
unqualified withdrawal but the taxes and penalties will only be on your earnings, not on the amount of the original
contribution.
The 529 plans have lots of investment options, which create a big decision for the grandparents to make.
Grandparents typically are more conservative than the child’s parents. The most popular approach to 529 investments
tends to be the age-based option. This is a simple way to save for college. You do not have to personally adjust
your allocations over time. The fund is managed according to the age of your grandchild. Younger children have more
of a stock concentration. As your child gets older, the assets are automatically shifted into a higher ratio of
short-term investments and more stable bonds.
Grandparents could also check and see if the 529 plan that your have set up will accept a third party
contributions. This will take all of the worry about opening and maintaining your own accounts. State tax
deductibility may be an issue if you go this route. Some states allow you a deduction for at least part of your
contribution to their 529 plans. As a third party donor you will not be eligible for this deduction.
If you ever need to apply for Medicaid benefits, the state will look at your 529 plans as countable assets. You are
eligible to take back the money you’ve invested so the money is technically available to pay medical or nursing
home expenses. If you have this concern, it is an issue to discuss with your tax professional or attorney. It might
be a good idea to make someone else the owner of the fund.
A big concern for grandparents is what would happen to the money in the 529 accounts if your grandchild chooses not
to attend college. A great option is to change the beneficiary to another family member or even yourself. You can
change the beneficiary as much as you want. Another option is to take the money in the fund for your needs. The
earnings in the account will be subject to a 10% penalty rate and will be taxable as income.
This is some of what contributing grandparents need to know about 529’s. It is a great way to invest in your
grandchild’s future. You have picked an incredible gift to give to your very lucky grandchild.
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