Advertisement
529 Plans

How a Grandparent's 529 Account Affects College Financial Aid

Distributions from a grandparent-owned 529 savings plan could reduce a grandchild's financial aid. But using one of these strategies can limit the impact.

Question: I read your column Shopping for a 529 Plan for a Grandchild. Don't grandparents have to be careful about opening a 529 for their grandchild because it could hurt his or her ability to get financial aid?

Answer: The way a 529 is owned can make a big difference in the financial aid calculations. If a grandparent contributes to a plan that is owned by the child's parents, the money in the 529 is considered to be a parental asset, and the federal financial-aid calculation expects parents to contribute up to 5.6% of their assets for college costs. Withdrawals from parent-owned 529s are not reported as income on the Free Application for Federal Student Aid (FAFSA).

Advertisement - Article continues below

But some grandparents open a separate 529 if they live in a state that only offers an income tax deduction for the account owner. (Most states that offer a tax break let any residents who contribute to a 529 take the deduction, but some limit the tax break to the account owner.) If the grandparents own the 529, the money in the account is not reported as either a parent's or a student's asset on the FAFSA. But distributions from the 529 must be reported as student income on the FAFSA, and students are expected to contribute 50 cents of every dollar of income toward college bills (after an income-protection allowance of $6,570 a year).

Advertisement
Advertisement - Article continues below

To minimize the impact on financial aid, you could wait to withdraw money from the grandparent-owned 529 until after the last tax year that counts for financial aid. New FAFSA rules that took effect in the 2017-18 school year changed the timing of the tax returns that are used. In the past, withdrawals from grandparent-owned 529s were counted as student income during the first three years of college. Now, distributions made after January 1 of the student's sophomore year of college won’t show up on the FAFSA (if the student graduates in four years). See New Strategies to Get More Financial Aid for more information about the new FAFSA schedule.

Another option is to switch the account owner to the parents before the money is withdrawn to pay for college expenses. That way, the withdrawals will not be reported as income on the FAFSA. However, not all 529 plans let you switch account owners. See www.savingforcollege.com for more information about each state's rules.

Advertisement

Most Popular

HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
Find a Great Place to Retire
happy retirement

Find a Great Place to Retire

Our cities provide plenty of space to spread out without skimping on health care or other amenities.
July 2, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020

Recommended

Tax Changes and Key Amounts for the 2020 Tax Year
tax law

Tax Changes and Key Amounts for the 2020 Tax Year

Americans are facing a long list of tax changes for the 2020 tax year...and it's never too early to start thinking about next year's return.
June 22, 2020
7 Ways the Pandemic Will Change College Forever
college

7 Ways the Pandemic Will Change College Forever

Colleges and universities face steep budget cuts, enrollment challenges and new types of competition as a result of COVID-19. We cover the changes you…
June 19, 2020
12 Tax Deductions and Credits That Help You Pay for College
Tax Breaks

12 Tax Deductions and Credits That Help You Pay for College

Whether you're saving for college, currently paying tuition, or dealing with student loan debt, there's probably a tax break that can help your bottom…
June 12, 2020
Milliennials Face Their Second Recession
credit & debt

Milliennials Face Their Second Recession

Forty percent of millennials say the pandemic will likely cause them to delay payments on their debts. Does that include you? Time to take action.
June 4, 2020