Grandparents often find themselves looking for a way to help their children or grandchildren with education expenses. There are a few strategies grandparents may consider depending on their preferences. The following are a few strategies grandparents may consider to help with higher education expenses. Grandparent-owned 529 plan. In this strategy the grandparent owns the 529 plan in their name and makes contributions to the plan. The benefit of this is that the grandparent can reduce their estate, take a potential state tax deduction (if their state allows), control the investments, take tax-free qualified distributions, and name/change the beneficiary. Furthermore, when the beneficiary files for financial aid (FAFSA), grandparent-owned 529 plans are not included in the assets of the parent or beneficiary in determining financial need. However, there’s potential downside to this strategy when the beneficiary files the FAFSA form to determine eligibility for financial aid. FAFSA considers parent-owned 529 plans […]
529 plan
Non-Qualified 529 Expenses – Taxation and Penalties
The intended purpose of 529 plans was to help individuals save for college education while receiving tax deferral of earnings and use of money tax- free for qualified expenses. However, sometimes money in the plan remains after paying for education expenses, a beneficiary decides not to go to college (and there no replacement beneficiary), or other events cause funds to be left unused. Plan owners have few options at this point, and one option may be to use money from the 529 plan for non-qualified expenses. Should this be the case, we need to look at how this money is handled. Generally, any money that’s taken from the plan for non-qualified expenses is taxed at the taxpayer’s ordinary income rates (marginal rates). Additionally, a 10% penalty is applied – like the 10% early withdrawal penalty on retirement funds. Furthermore, if the owners took at state income tax deduction for the […]
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Qualified 529 Expenses
Money in a 529 plan may be used cover a wide range of expenses related to higher education. As we go through this section, we will also delineate between expenses allowed federally, but may not be allowed by some states. Qualified expenses include tuition and fees related to attendance to the educational institution. It’s important to note what the IRS considers a qualified education institution. A qualified educational institution is generally a college, university, tech school, or other institution that participates in the Department of Education’s student aid program. This include public, private, non-profit and for-profit higher education institutions. Room and board expenses also qualify, but there are certain conditions. The student must be enrolled at least half-time at the school. Expenses are also limited to the actual cost of the room and board if the student is living in housing operated by the institution, or if living off campus, […]
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529 Plan Beneficiaries
Owners (usually parents) of 529 plans set them up for the purpose of funding future college education expenses for beneficiaries (usually their children). However, 529 plans allow for beneficiaries other than the owner’s children. Beneficiaries may be changed on 529 plans at the owner’s discretion. Who qualifies as a beneficiary for a 529 plan? According to IRS Publication 970, the following may be beneficiaries of 529 plans: The account owner. Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Brother, sister, stepbrother, or stepsister. Father or mother or ancestor of either. Stepfather or stepmother. Son or daughter of a brother or sister. Brother or sister of father or mother. Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. The spouse of any individual listed above. First cousin. 529 plans only allow one beneficiary per plan. Owners with multiple children or beneficiaries will need to determine their plan […]
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Saving for College
If you’re a parent or plan to be one, chances are you are considering ways to pay for your child’s college education. You may have a goal of sending them to public or private school, with the hope of helping them graduate college with little, if any debt. Whether or not your goal is to fully fund your child’s education or to help as best you can, there are some options to consider saving as much as you can to reach or education savings goal. One option to consider is a 529 college savings plan. 529 plans allow money to be contributed specifically for many of the costs of higher education. Money that goes into the account grows tax-deferred, and money withdrawn for qualified college education expenses (tuition, room & board, books, fees) is tax-free. Many states sponsor their own college savings plans, and some allow a state tax deduction […]
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529 Plan vs. Student Loan
When planning for the cost of college for your children, often parents and grandparents think of the 529 plan due to the tax benefits. Almost ten years ago the 2006 Pension Protection Act made the tax treatment of 529 plan college savings instruments permanent. This will be familiar ground for most, but perhaps parents of future college students need to a refresher. It will always be cheaper to save for college than to pay for loans. If you’re in the position of most folks – with enough assets that you figure your child won’t be considered for financial aid – then it pays in spades to save now. If you saved $150 a month into a 529 plan for 10 years at 4% rate of return, you’d have just over $22,000 saved up. If, on the other hand, you didn’t save that money and had to borrow $22,000, paying it […]
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