Interested in supporting your grandchild’s future college education? The recent implementation of the FAFSA Simplification Act allows grandparents to enhance their contributions towards financing their grandchild’s education. This change became effective last month, offering increased opportunities for support.
Previously, any additions or withdrawals from a grandparent’s 529 college savings plan had to be reported on the FAFSA, potentially affecting the student’s eligibility for federal financial aid. Fortunately, the recent changes have ushered in a positive shift.
In this blog, you’ll learn what has changed under the new rule and how grandparents can leverage it to support their grandchild’s educational pursuits.
Understanding the 529 Account
First things first – what exactly is a 529 college savings account? It’s a special savings account designed to help individuals, including grandparents, set aside money for future college expenses. Contributions aren’t federally tax-deductible, but the good news is that earnings within the account grow tax-free. When funds are withdrawn for qualified education expenses, they remain untaxed.
What The New Rule Changes
If the account owner is a dependent student or custodial parent, the entire value of the 529 plan is disclosed as an investment asset on the Free Application for Federal Student Aid (FAFSA). In the past, when a grandparent owned the 529 plan, any distributions were viewed as untaxed income for the student, which could impact financial aid eligibility. The forthcoming change addresses and resolves this issue.
In summary, a 529 plan owned by a grandparent no longer needs to be reported on the FAFSA. Furthermore, distributions from this grandparent-owned 529 plan won’t be considered untaxed income for the student. This change creates opportunities for grandparents to support their grandchild’s education without risking financial aid eligibility.
Maximizing Grandparent Contributions
It’s important to keep the following in mind when you make contributions to a 529 account for a grandchild:
1 | Funds Must Be Used For Qualified Educational Expenses
Grandparents can use 529 plan funds for a range of qualified educational expenses, including tuition, room and board, books, supplies, laptops, and internet access. However, certain expenses like insurance, student health fees, transportation, and extracurriculars are not covered and may incur a ten percent penalty if 529 plan funds are used toward these expenses.
2 | The Annual Gift Exclusion
While grandparents can contribute to their grandchild’s 529 plan, it’s essential to be mindful of the federal annual gift exclusion, which is the amount of money a person can gift to someone else without needing to file a gift tax return. The limit currently stands at $18,000 for an individual and $36,000 for those filing jointly with a spouse. A special rule allows gift givers to spread larger one-time gifts across five years to stay within their lifetime gift exclusion.
3 | Reconsider Payments Made Directly to The School
Distributions directly paid to the school from grandparent-owned 529 accounts will not affect aid eligibility. However, for now, it’s recommended to pay the grandchild directly.
4 | Timing Matters
When withdrawing funds from the 529 plan, it’s crucial to do so within the same tax year as the educational expenses. This strategic move ensures smooth financial transactions and adherence to tax regulations.
5 | Watch Your Withdrawal Limits
The amount withdrawn from all 529 plans should be no more than the total cost of the qualified educational expenses billed by the school. Excess withdrawals may incur a 10 percent penalty, but there’s a 60-day window to rectify the situation without penalties.
Helping You Plan For Your Family’s Future In The Most Loving Way Possible
The opportunity to positively impact the younger generation’s future is truly heartening. By familiarizing yourself with the updated FAFSA rule and strategically using 529 plans, you can make a significant contribution to your grandchild’s education while safeguarding their financial aid opportunities. This enhances the value of a 529 account as not only a financial tool for educational support but also as a means to leave a legacy of love and wisdom.
We believe this is what estate planning is all about – your Life & Legacy. That’s why we refer to estate planning as Life & Legacy Planning. It isn’t just about making a plan for what happens to your assets when you die – it’s about making meaningful, heart-centered decisions that provide peace, love, and guidance to the ones you love today and for years to come in the future.
If you’re ready to create a plan that takes care of everything you own and everyone you love in the most loving way possible, give us a call to learn what a Life & Legacy Planning Session can do for you.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a no-obligation 15-minute introductory phone call today.