Tips for Grandpa Who Wants to Help with 529 Plan


Dear Dr. Don, 

Is it appropriate for me as a grandparent to own the college 529 savings plan that I have set up for a grandchild? Or, I'm wondering if it would be better to transfer the account to the parents or the child. Would this affect their desire to get college aid?

Thank you, 

-Ralph Regifting

Dear Ralph, 

States sponsor these so-called 529 plans. The name comes from the section of the federal tax code that allows for potentially significant tax benefits. With the rising cost of college and university tuition, many students and their families need every bit of financial help they can get.

It sounds like you might be concerned if withdrawals from a 529 plan owned by a grandparent are counted as income on the Free Application for Federal Student Aid, known as FAFSA.

One way to successfully manage this issue is to use the money from your account for the student's last year of school, since that income would come too late to negatively affect student financial aid. This presumes your account has a year or less of qualified education expenses available for your grandchild.

If you move the money to a 529 plan owned by your child or grandchild, the eventual withdrawals from the account for qualified education expenses wouldn't be counted as income in the FAFSA. If you decide to transfer ownership, name the account beneficiary as the owner, not the parent. This will help avoid possible gift-tax liability. Make sure the account custodian can make the ownership change without classifying it as a distribution, or taxable withdrawal.

You might need to move the account to a state where such transfers are easier. For that matter, be mindful of any potential tax issues if you made tax-deductible contributions to the account as owner and are changing ownership. Here's where working with a tax professional, like an accountant, might be useful to you.

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