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529 Plans

How grandparents can help grandchildren with college costs Article Courtesy of Nancy Harris, CMFC, CDFA President, LPL Financial Planner, New Foundation Wealth Group

529 Plans

Helping to pay for a grandchild's college education can bring great personal satisfaction and is a smart way for grandparents to pass on wealth without having to pay gift and estate taxes.


A 529 plan can be an excellent way for grandparents to contribute to a grandchild's college or graduate school education, while simultaneously paring down their own estate. Contributions to a 529 plan grow tax deferred, and withdrawals used for the beneficiary's qualified education expenses are completely tax-free at the federal level. Participation in a 529 plan isn't restricted by income level, and lifetime plan contribution limits are high.


A 529 savings plan is an individual investment account where you direct your contributions to one or more of the plan's investment portfolios, similar to a 401(k) plan. Funds in the account can be used to pay total qualified expenses (i.e., tuition, fees, room and board, books, supplies) at any accredited college in the United States or abroad. Funds can also be used to pay K-12 tuition expenses, up to $10,000 per year.


Grandparents can open a 529 account and name a grandchild as beneficiary, or they can contribute to an already existing 529 account. Grandparents can contribute a lump sum to a grandchild's 529 account, or they can contribute smaller, regular amounts.


Regarding lump-sum gifts, a big advantage of 529 plans is that under special rules unique to 529 plans, individuals can make a single lump-sum gift to a 529 plan of up to $85,000 (in 2023), and married couples can make a joint gift of up to $170,000, and avoid federal gift tax. To do so, a special election must be made to treat the gift as if it were made in equal installments over a five-year period, and no additional gifts can be made to the beneficiary during this time.


Significantly, this money is considered removed from the grandparents' estate, even though in the case of a grandparent-owned 529 account the grandparent would still retain control over the funds. There is a caveat, however. If a grandparent were to die during the five-year period, then a prorated portion of the contribution would be "recaptured" into the estate for estate tax purposes.


Grandparents who are considering opening a 529 account should keep this in mind. Withdrawals from a 529 account used for a purpose other than college expenses—for example, medical expenses or emergency purposes—face a double consequence: the earnings portion of the withdrawal is subject to a 10 percent penalty and will be taxed at the grandparents' ordinary income tax rate.


Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.


Prior to investing in a 529 plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

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