Did you know ...- If your grandchild doesn't go to college or gets a full scholarship, you can name another grandchild as beneficiary of your 529 account with no penalty
- Many states offer income tax deductions for contributions to their 529 plan
- Funds in a 529 college savings plan can be used for graduate school
NoteInvestors should consider the investment objectives, risks,
charges, and expenses associated with 529 plans before investing; specific plan information is available in each issuer's official
statement. There is the risk that investments may not perform well enough to cover college costs as anticipated. Also, before
investing, consider whether your state offers any favorable state tax benefits for 529 plan participation, and whether these benefits are contingent on joining the in-state 529 plan. Other state benefits may include financial aid, scholarship funds, and protection from creditors. | | 529 Plan Basics
Section 529 plans are governed by federal law (section 529 of the Internal Revenue
Code) but are sponsored by states and, less commonly, colleges.
Each plan may have slightly different features, but each must conform to the federal
framework. There are two types of 529 plans — savings plans and prepaid tuition
plans.
Each type of 529 plan has an account owner, who is the person who opens the account,
and a beneficiary, who is the person for whom contributions are being made. The
account owner has the flexibility to make contributions to the account, request
withdrawals from the account, change the investment selections for the account (for
savings plans only), and change the beneficiary of the account. People of all income levels are eligible to open an account.
Grandparents can open a 529 account and name their grandchild as beneficiary (only
one person can be listed as account owner), or they can contribute to an already
established 529 account. 529 savings plans529 savings plans are the more popular type of 529 plan; nearly all states offer one or
more of these plans. A 529 savings plan functions like an individual investment-type
account, similar to a 401(k) plan. You select one or more of a plan's investment portfolios, and you either
gain or lose money, depending on how those portfolios perform. Funds in the account can be used to pay the full cost of tuition, fees, housing, food, books, and supplies at any accredited college or graduate school in the United States or abroad. Funds can also be used to pay K-12 tuition expenses, up to $10,000 per year. Most 529 savings plans have lifetime contribution limits of $350,000 and up (limits vary by state). 529 prepaid tuition plansBy contrast, a prepaid tuition plan pools your contributions with the contributions
of others, and in return you get a predetermined number of units or credits that
are guaranteed to be worth a certain percentage of college tuition in the future
(in effect, you are paying future tuition with today's dollars). Funds in a prepaid
tuition plan can only be used to cover tuition and fees at the limited group of
colleges that participate in the plan, which are typically in-state public colleges.
Prepaid tuition plans are generally limited to state residents, whereas
savings plans are open to residents of any state. Grandparent as account ownerA grandparent isn't required to be the account owner of his or her grandchild's
529 plan to
make contributions to the account. But if the grandparent is the account owner,
there are some additional considerations. First, as account owner, a grandparent can retain some measure of control over his
or her contributions by changing investment selections, authorizing account withdrawals
for both education and non-education purposes, or even closing the account. A grandparent
will have this control over these contributions even though they generally aren't
considered part of his or her estate for tax purposes — a rare advantage in the estate
planning world. However, funds in a grandparent-owned 529 plan can still be factored
in when determining Medicaid eligibility, unless these funds are specifically exempted
by state law.
Second, regarding financial aid, a grandparent-owned 529 account does not need to be listed as an asset on the federal government's aid application, the FAFSA. And starting with the 2024–2025 school year, distributions from grandparent-owned 529
plans will no longer need to be listed on the FAFSA and counted as student
income — students won't be required to report any type of cash support. (Previously, distributions from a grandparent-owned 529 plan were reported as untaxed income to the student, and this income was assessed at 50% by the FAFSA.) By contrast, a parent-owned 529 plan is reported as a parent asset on the FAFSA (parent assets are assessed at 5.6%) but distributions from a parent-owned 529 plan aren't counted as student income. Colleges have their own rules when distributing their own financial aid. Most colleges require a student to list any 529 plan for which he or she is the named beneficiary, so grandparent-owned 529 accounts would be treated the same as parent-owned accounts. |