Did you know that Americans owe nearly $1.75 trillion in student loan debt? This staggering number is spread out among 48 million borrowers. But as a grandparent, you can help your children and grandchildren mitigate this by contributing to a 529 plan. A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs.
According to a recent survey by the College Savings Plans Network, the average 529 plan balance as of Dec. 31, 2021, was $30,652. But is that an adequate amount? Most student tuition and housing costs are going to run much higher than that for four years of college ($43,755/year for a private school and $11,631/year for state residents at public colleges), and many students will need to rely on a combination of savings and financial aid to pay for some or all of those costs.
If you are looking to save money for your grandchildren’s education without hurting their aid eligibility, some recent changes in 529 plans are going to make that easier.
Simplifying the application process is in the works
Good news: The government is working to streamline the FAFSA (Free Application for Federal Student Aid) application process, as part of a bill that was signed into law in December 2021.
Some of the changes are being phased in over multiple calendar years. We can expect to see a new streamlined FAFSA form in October of 2022. Some changes went into effect for the 2021-22 award year, while other changes won’t be completely implemented until the 2024-25 award year.
Distributions from your 529 will no longer reduce your grandchild’s financial aid
In the near term, there’s a welcome change that grandparents can begin taking advantage of for financial planning purposes.
Under the old FAFSA rules, students were required to report distributions from grandparent-owned 529 savings plans as untaxed student income, which had the potential of reducing a student’s aid eligibility by up to half of the distributed amount from the college savings plan.
In other words, a $15,000 distribution from a grandparent’s 529 plan could reduce aid eligibility by $7,500. This has led some families to do some tricky planning — where grandparents would delay 529 distributions until the grandchild was in their last few years of college to avoid the potential financial aid eligibility pitfalls.
Fortunately, with the FAFSA simplification come new rules regarding how grandparent 529 assets are treated. The new rules, effective for the 2023-2024 school year, will no longer count distributions from grandparent-owned 529 college savings plans as untaxed student income, and they will not have a detrimental impact on aid eligibility.
But grandparents can take advantage of the new 529 rules now. Why? The FAFSA looks back at the prior two years of a student’s income tax returns.
If you want to retain control over your college savings for one or more grandchildren, you can now do so without having to worry about it hurting their financial aid eligibility. And you can say goodbye to the complexities of planning distributions in future calendar years to avoid potential problems.
Superfunding five years of gifting into one
One advantage of 529 plans that many people aren’t aware of is that they allow a contributor to superfund five years’ worth of tax-free gifting into a single calendar for a beneficiary. Normally you can gift $16,000 per year using the annual gift tax exclusion amount. With a 529 you can gift $80,000 in one year (or $160,000 if married filing jointly) and avoid gift taxes. You can only do this every five years, but this strategy does offer some great planning opportunities.
An added benefit for wealthy families is that 529s can remove assets from your estate while allowing you to retain control over them. A 529 savings plan is a great vehicle for accelerating savings and maintaining tax efficiency.
529 college savings plans continue to be popular vehicles for college savings. Growth and earnings of assets in these plans are tax-free as long as future cash distributions are used for qualified educational purposes, including such things as tuition, textbooks and computers.
With the new FAFSA changes, it’s a great opportunity for grandparents to revisit their savings plan.
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser located in Long Beach, California. Registration does not imply a certain level of skill or training. Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com. This blog is provided for informational purposes only and should not be construed as personalized investment advice. It should not be construed as a solicitation to offer personal securities transactions or provide personalized investment advice. The information provided does not constitute any legal, tax or accounting advice. We recommend that you seek the advice of a qualified attorney and accountant. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.
Shane W. Cummings is based in Halbert Hargrove’s Denver office and holds multiple roles with Halbert Hargrove. As Director of Technology/Cybersecurity, Shane’s overriding objective is to enable Halbert Hargrove associates to work efficiently and effectively, while safeguarding client data. As wealth adviser, he works with clients in helping them determine goals and identify financial risks, creating an allocation strategy for their investments.
Six Steps to Take if You've Recently Inherited Money From a Loved One
It’s important to deal with the emotional aspect first before tackling the financial one.
By Kiplinger Advisor Collective Published
Alaska Airlines to Buy Hawaiian: Get Bonus Miles Now
How to use the Alaska Airlines credit card and frequent flyer program to save on trips to Hawaii, Alaska and beyond.
By Ellen Kennedy Published
11 Reasons to Consider a 1031 Exchange
Deferring capital gains taxes might be at the top of the list, but growing your portfolio and your wealth and helping with estate planning are also compelling reasons.
By Daniel Goodwin Published
Why It’s Time to Give Bonds Another Look
Yields are much more attractive now, but you should use discretion to find the bond allocation that’s best for you.
By Bill Aldrich, CLU® Published
Estate Planning and the Legal Quirks of Retiree Cohabitation
Creating an estate plan for an unmarried couple is already challenging, but when the cohabitating couple are in their golden years, it’s especially tricky.
By David Handler, J.D. Published
Seven Financial Planning Stops to Put on Your Map to Financial Security
Creating a comprehensive plan is just the start, though. Checking in regularly to make sure you’re still on track is imperative.
By Michael E. Lewis II, CFP®, CLU®, ChFC® Published
How to Measure the Health of Your Retirement Plan
These five key indicators can help you make decisions based on the overall performance of your retirement plan rather than individual variables.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
Four Easy Ways to Get Yourself Fired
Being a standout on the job can sometimes be as simple as showing up to meetings on time, responding promptly to requests, doing your homework and not being a jerk.
By H. Dennis Beaver, Esq. Published
How Might the Great Wealth Transfer Change Society?
As $84 trillion in assets move from Baby Boomers to younger generations, we could see a greater emphasis on financial technology and investing based on values.
By Jennifer Wines, JD, CPWA® Published
Why More Retirees Might Come Out of Retirement
It’s often not solely because of financial reasons, but because of a lack of purpose in retirement. This financial expert can relate.
By Chris Blunt Published