529 Plans
For Your Grandchildren BY LAURA I. ROTTER Students will not be required to report any cash support they receive, including any contributions from 529 plans held by grandparents. In other words, it’s now much more attractive for grandparents to open and contribute to 529 plans, since they will have no impact- on fi nancial aid at schools that use the FAFSA form.
A client of mine recently reached out about whether or not to fund a 529 plan for his granddaughter - and she’s not due to be born for another four months. Talk about getting a head start on college planning!
He’ll have to wait a bit though. You cannot set up a 529 plan for an unborn child since a Social Security number is required for the named beneficiary of the plan. But you certainly can begin contributing once your grandchild arrives.
Be aware that grandparent-held 529 plans may still be consideredbytheCSSProfile,another financialaidapplicationusedby approximately 300 schools, including some of the most elite universities. It remains to be seen if this You are able to change beneficiaries on THE TAX ADVANTAGE In many states, New York included, contri- the 529 plan without negative tax conse- will be adjusted in the future to reflec changes in the FAFSA form. Since income is butions to 529 plans are tax deductible. As quences,aslongasthenewbeneficiary - from fam two years prior is used for the applithe owner, you are allowed to deduct up to amemberoftheoriginalbeneficiary’s $5,000 per year of contributions by an indi- ily. So if your oldest grandchild receives a cation (i.e., 2019 income was used for the vidual and up to $10,000 per year by a mar- full scholarship to their dream school, you 2021-2022 school year), grandparents can are New able to use the funds for her younger still set up a 529 plan, being careful to pay riedcouplefilingjointlywhencomputing York State taxable income. The money in a sibling - or perhaps for yourself, if you’re tuition only in the last two years of school soasnottoa-•ecttheCSSProfilefinancial 529 plan can grow tax free and withdrawals interestedinreinventing! aid eligibility. aren’t taxable if used to cover eligible educaIn the past, I might have recommended that you gift the funds to your child, who would Not surprisingly, many of us are interested open the 529 plan as the owner with their in helping our grandchildren and, by extension, our children pay for the high cost childasbeneficiary.Thiswasbecause, - un der current FAFSA rules (the Free Appli- of future college tuition. If this sounds like cation for Federal Student Aid is the form you, consider the benefits of opening a 529 plan rather than later. parents fill out to qualify for financial aid)sooner , Another benefit of a 529 plan is that - con tion expenses, including college books and supplies, computers and internet access, and room and board in addition to tuition. Up to $10,000 of annual K through 12 costs are also considered eligible education expenses.
tributions are considered gifts for tax pur- any tuition payments from 529 plans held poses. In 2022, you can contribute up to by grandparents were considered untaxed $16,000 as an individual, or $32,000 as a income to the student and could reduce aid married couple, without having to pay gift eligibility by up to 50% of the distribution taxes. You also have the option of “super- amount. funding” a 529 plan: making a contribution ofuptofivetimestheannualgifttax - THE excluGOOD NEWS sion (up to $80,000 from an individual in When new FAFSA rules go into e-•ect in 2022 or $160,00 from a married couple), October 2022, only income reported on federal tax returns will be considered. without owing any gift taxes. spring 2022
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Laura I. Rotter, CFA, MBA, CFP, is founder of True Abundance Advisors, a fiduciary, fee-only financial planning firm. She works with clients remotely or in person to help them clarify their goals and develop an integrated plan to achieve these goals. Call her at 914-222-0832 or email Laura@Trueabundanceadvisors.com to schedule a free initial consultation.
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