New College Savings Option: How to get more money without reducing need awards
There is a new way to save money for college that won’t impact your student’s ability to qualify for financial aid. This change is in the 529 college savings program. It’s a change that every parent, grandparent, or friend of a future scholar should know. Simply put, grandparents can now open up 529 savings plans without hurting the student’s ability to get financial aid!
The 529 college savings plans
529 college savings plans provide a way to contribute after-tax money into an account designated for a beneficiary (the student). The account holder controls the plan on student’s behalf, so there is little risk that the intention of the funds won’t be for education. As the deposits grow over time, any gains on the deposits are tax-free as long as they are used for qualified educational expenses. Even better, these funds can be for both college and K-12 qualified expenses. Funds not used for education will be subject to ordinary income taxes and a 10% penalty.
Anyone can open a 529 savings plan for a future student. However, suppose a distribution comes to the student from a non-parent account. In that case, the distribution is to be treated as untaxed income to the child. Up to 50% of this distribution could impact the student’s ability to receive other aid through the Free Application for Federal Student Aid (FAFSA). On the other hand, if the account is in the parent’s name, the reduction in aid eligibility maxes out at 5.64%!
More options for financial aid
It appears now that a grandparent can open up a 529 savings plan without it hurting the future student’s ability to get federal aid. Potentially, this may also inclued any non-custodial parent or friend. In the eyes of the new FAFSA, this funding is now virtually invisible to them as they calculate a student’s financial needs. This is because they are no longer asking questions about the grandparent’s contributions. So not only will the assets in the 529 account be ignored, but the distributions from the 529 account will also not influence the FAFSA results.
If you are considering this option to help fund the ever-increasing cost of college, here are some considerations and ideas:
- Let grandparents know of the change. Consider having your parent create an account for the benefit of your child (their grandchild). Then put their gifts into the account, instead of giving cash to your child. Remember, with special funding rules, they can contribute up to the gift threshold limit each year or even more. It is currently $17,000 per person in 2023.
- No college? No problem. If your grandchild doesn’t go to college and there isn’t a need to fund K-12 education, you can change the beneficiary to another family member.
- Need to pull the money. If you need to pull the money, remember that the original contributions are tax and penalty-free. Taxes and penalties only apply to distributed earnings in the account.
- Consider other applications. If the student goes to a private school, disclosure of these grandparent contributions are necessary, so plan accordingly.
Take the next steps
Given the ever-increasing collge costs, now is a great time to have more advocates help save for future educational expenses. These extra savings could make a big difference in reducing your student’s future debt obligations. Contact our RRBB accountants and advisors for more information.
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