Cortburg Speaks Retirement

What Should Grandparents Know About 529\Savings Accounts?

May 05, 2021 Miguel Gonzalez, MBA, AIF®, CPFA®, CRC® Season 2021 Episode 32
Cortburg Speaks Retirement
What Should Grandparents Know About 529\Savings Accounts?
Show Notes Transcript

In this week’s podcast, I answer the question What Should Grandparents Know About 529 Savings Accounts?

INTRODUCTION

Welcome to Cortburg Speaks Retirement

An audio podcast about investing in the stock market, financial planning, money management and retirement planning.  Each Wednesday, we help investors at all stages of life learn how to potentially grow and preserve their money from first job through retirement.

Now here is your host, Miguel Gonzalez.

 

HOST

Good morning and welcome to the CORTBURG SPEAKS RETIREMENT audio podcast.   

In this week’s podcast, I answer the question What Should Grandparents Know About 529 Savings Accounts?

Grandparents can often find themselves in a better financial position to save for their grandchildren's education than their own children are. The parents of prospective students may still be contending with competing priorities like their own student loans, high-interest credit card debt, or a hefty mortgage. 

One way to help save for a grandchild's college education is by contributing money to a 529 savings account, an account where funds can be saved or invested and are withdrawn to be used exclusively for college-related expenses.[1] What else should grandparents know about 529 college savings accounts?

Grandparent-Held 529 Accounts Won't Increase the Expected Family Contribution

Every family who fills out the Free Application for Federal Student Aid (FAFSA) receives an "expected family contribution" (EFC) calculation. The EFC is designed to measure how much the family can afford to pay per year for the child's college education; the lower the EFC, the more need-based aid may be available. While parent-held 529 college savings accounts will count as an asset for EFC purposes, grandparent-held 529 accounts don't; this may allow the child to be eligible for more financial aid than they would be if the account was held by a parent.1

An Income Tax Deduction May Be Available

More than 30 states (and the District of Columbia) offer a state income tax deduction or credit for contributions to a 529 account (even one that is owned by someone else, such as the child's parent).2 This means that if a grandparent contributes $5,000 to their grandchild's 529 in a given tax year, they can receive a tax credit of anywhere from a few hundred dollars to $1,000 or more, depending on the state's tax treatment. For those who are looking to reduce their tax rate while helping the next generation, contributing to a 529 can be a good means by which to do so.

529 Plans are Fungible

One relative disadvantage of 529 plans is that they can only be used on educational expenses—similar to how a Health Savings Accounts can only be used for healthcare expenses. But even if a 529 beneficiary opts out of college, that doesn't mean these funds are wasted. Grandparents can easily designate an additional (or substitute) beneficiary and use these funds to pay for that person's educational expenses instead.

The same principle holds if the first beneficiary doesn't use all the funds in their 529. Any leftover funds can be directed to other family members simply by adding them as a beneficiary. Grandparents may therefore opt to simply contribute funds to one general 529, adding grandchildren as beneficiaries shortly before they begin college.

Make sure to visit our website, www.CortburgRetirement.com. Our site is filled with educational videos, eBooks, publications, and financial calculators designed to help you learn more about your finances.  As you search our site, send us a note regarding any questions you may have about any particular investment concepts or products. We will get back to you quickly with a thoughtful answer.

This is Miguel Gonzalez, Retirement Specialist and Managing Partner, with Cortburg Retirement Advisors signing off for this week’s educational podcast.  

 

DISCLOSURES  

Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision. 

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

CRC conferred by The International Foundation for Retirement Education.

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Private Advisor Group, LLC, a registered investment advisor.  

Private Advisor Group, LLC and Cortburg Retirement Advisors, Inc. are separate entities from LPL Financial.

Investing involves risk including possible loss of principal.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. 

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

1 https://www.fastweb.com/financial-aid/articles/how-do-grandparent-owned-529-college-savings-plans-affect-financial-aid-eligibility

2 https://www.savingforcollege.com/article/how-much-is-your-state-s-529-plan-tax-deduction-really-worth

https://www.fidelity.com/learning-center/personal-finance/college-planning/grandparents-can-help-fund-college