Written by Alex Seleznev, MBA, CFP®, CFA | June 12, 2024
We frequently work with grandparents who want to support their grandchildren.
When dealing with larger gifts, 529 college savings plans present one of the best choices from tax, investment, and estate planning perspectives.
Earlier this year, we had a great collaboration with Elville & Associates on this topic, one of the leading estate planning firms in the Baltimore and D.C. metro area.
Check out the full recording HERE to learn about the benefits and important nuances of 529 college savings plans for grandparents.
If you don’t have time to watch the recording, below are the top five questions and benefits of using 529 college savings plans.
1.) Why are these accounts specifically beneficial to grandparents?
Many grandparents want to provide significant financial support to their grandchildren but want to ensure the funds would be used appropriately.
There is no certainty of how the funds would be used if you make direct monetary gifts to grandchildren or even their parents.
529 plans allow you to control exactly how the funds are invested and who receives the distributions from the account and when.
2.) What are the tax and investment benefits?
The contributions you make into the plan will grow tax-deferred until you use the funds.
There will be no taxes to pay (i.e., tax-free) if you use the funds for qualified expenses such as college tuition, room and board, books, and so on.
3.) Will I receive a tax deduction?
Yes, as long as you make a contribution to your state-specific 529 plan.
The tax deduction is on the state level only. There is no federal deduction.
4.) What are the estate planning advantages of 529 plans?
You can apply the 5-year averaging rule and contribute up to $90,000 per person without reducing your lifetime gift tax exemption in 2024.
This is a great benefit for those who want to pre-fund their grandchildren’s college savings accounts.
5.) Are there any additional benefits?
Under SECURE Act 2.0, any unused funds in the 529 plan account can be converted into a Roth IRA by the beneficiary.
The FAFSA Simplification Act created a “grandparent loophole”. The 529 plans owned by grandparents are not required to be reported on FAFSA.
In short, even though there are many other options to support your grandchildren financially, 529 college savings accounts are frequently the best choice.