For grandparents who want to help with college costs, one of the most effective tools is a 529 Plan. 529 Plans are state-sponsored investment vehicles that allow assets to grow tax free when used for qualified higher education expenses. Plan funds can be used for a lot more than just tuition. Required fees, certain room and board costs, books, supplies, as well as computers and related technology costs such as Internet access fees and printers can all qualify as expenses. Georgia’s 529 Plan is the Path2College 529 Plan, managed by TIAA-CREF, and offers a variety of investment options including age-based options, designed to become more conservative as the child reaches college age.
A student can be the beneficiary of more than one 529 Plan, so grandparents are free to open an account on their own. They do not have to contribute to the plan a parent may have opened. There are also benefits to grandparent-owned 529 Plans. When the assets are in the grandparents’ name, they are not counted in the federal financial aid calculation; therefore, if your contributions will only pay for a portion of your grandchild’s education, the assets won’t initially affect your student’s financial aid eligibility. However, once funds are withdrawn and used for college expenses, that money is considered income to the student for the financial aid calculation. Student income is counted at 50%, so a $5,000 withdrawal would reduce eligibility by $2,500. Beginning with the 2017-18 school year, the calculation will use prior-prior year’s income, so grandparent-owned 529 Plans can benefit a student for both the junior and senior years without negatively affecting financial aid eligibility. Assets can also be used for graduate school.
Georgia also offers up to $4,000 per year, per beneficiary state tax deduction for contributions to the Path2College 529 Plan for those filing a joint return. While it isn’t a huge tax savings, it is still a valuable benefit.
If you are in a position where you do not need your required minimum distributions for living expenses, you can direct those funds to a 529 Plan for your grandchildren. You can contribute up to $14,000 a year without incurring a gift tax or up to $28,000 for joint filers. You can also “super fund” a 529 Plan by contributing five years of contributions at once—$70,000 for single filers and $140,000 for joint filers—if the account owner elects to treat the contributions as having been made over a five year period. If your estate is large enough to be subject to estate tax, super funding a 529 Plan can be a good way to remove assets from your estate.
The downside to 529 plans is that if funds are not used for college expenses, you will likely owe federal and state tax and a 10% federal penalty on the earnings portion. But before you go down this path, know you can change the beneficiary at any time as long as the new beneficiary is an eligible member of the previous beneficiary’s family.
Other options for paying for college expenses include pulling penalty free funds from your Roth IRA or paying tuition directly to the college. You will still pay income tax on the portion of the distribution that would otherwise have been subject to income tax, but you can avoid a 10% early withdrawal penalty if you are younger than 59 ½. Furthermore, your contributions to a Roth can be pulled out tax and penalty free at any time, so you may consider leaving the earnings in the Roth so they can grow for your own retirement. Paying tuition directly to the college allows you to preserve your annual $14,000 gift tax exclusion should you want to give your grandchild cash or other assets throughout the year.
While these are only a few options for grandparents to pay college expenses, the number of decisions can be overwhelming. While you can do it on your own, it is extremely beneficial to have the guidance of a tax professional or a financial adviser. If you have questions regarding how you can help with college expenses for your grandchildren, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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