Grandparent with 529 plans

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marathonwmn
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Grandparent with 529 plans

Post by marathonwmn »

I’m looking for holes in this strategy:

A few years back I opened a 529 plan for each of my grandchildren. I am the owner and each grandchild is the beneficiary. The amount in the accounts is approximately 5K and 3K respectively (perhaps not enough to worry about). The grandchildren are 15 and 10.

I have since learned that distributions from a 529 plan owned by a grandparent will reduce eligibility for need-based aid by as much as 50% of the amount of the distribution.

It occurs to me that I could change the beneficiary designations to my daughter who still has higher education loans and let her use the funds to reduce her loans. Up to $10,000.00 per year.
There are no tax consequences or penalties when a 529 plan beneficiary is changed to a member of the beneficiary’s family. Qualified family members include the beneficiary’s:
-Spouse
-Son, daughter, stepchild, foster child, adopted child or a descendant
-Son-in-law, daughter-in-law
-Siblings or step-siblings
-Brother-in-law, sister-in-law
-Father-in-law, mother-in-law
-Father or mother or ancestor of either, stepmother, stepfather
https://www.savingforcollege.com/articl ... r-529-plan

Simultaneously my daughter would open a 529 plan for each of the grandchildren. She would be the owner of the plans and I can fund them through the sale of EE bonds. The sale of the EE bonds will be tax free since the proceeds from the redemption were deposited to the 529 plans within 60 days of redemption.

Thanks for reading, and your thoughtful replies.

If a 529 plan is reported as a parent asset on the FAFSA, it will reduce eligibility for need-based aid by as much as 5.64% of the asset value.
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Opalmanta
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Re: Grandparent with 529 plans

Post by Opalmanta »

If the grandparent 529 is used to pay college expenses of grandchild beneficiary starting with junior year, it will not affect the fafsa calculation as fafsa calculation is a 2 year look back calculation. Doing so before that WILL affect the calculation.
Jack FFR1846
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Re: Grandparent with 529 plans

Post by Jack FFR1846 »

You could ask about the outcome of the FAFSA form or other forms used for private colleges. Since most aid is loans these days, it's very possible with a middle class income that the kids are getting nothing but Stafford loans anyways. If they are getting zip, drain the 529 with the first semester bill.
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dukeblue219
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Re: Grandparent with 529 plans

Post by dukeblue219 »

marathonwmn wrote: Tue Mar 16, 2021 7:23 pmI could change the beneficiary designations to my daughter who still has higher education loans and let her use the funds to reduce her loans. Up to $10,000.00 per year.
Double check this. I'm almost certain it's $10k lifetime. Not per year.
DIFAR31
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Re: Grandparent with 529 plans

Post by DIFAR31 »

The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
Jablean
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Re: Grandparent with 529 plans

Post by Jablean »

I agree with all suggestions and my own is to make sure that your daughter knows what type of account you have. My mother said she was putting college funds away for my son and I assumed 529. She had actually been doing a UMTA which has different college FAFSA effects since it's consider the student's as well as the child possibly having to file taxes. I didn't know there was such a thing as a UMTA so she might have tried to explain it but I didn't really understand until she passed away and I was working on all of her accounts.

On your 529s, also don't think that they are too little. A lot depends on if the student is able to live at home or goes to a residential college. Mine goes locally and I'll rotate about $12,000 through over the 4-5 year process taking some out each year but also recontributing to keep getting my state tax break. We may not even touch his UMTA unless he goes to grad school. And I'm paying much more attention to college tax credits like the AOTC and Lifetime Learning which I don't think college planning guides talk about nearly enough even though they can really take a bite out of state college tuition.
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JoeRetire
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Re: Grandparent with 529 plans

Post by JoeRetire »

DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is great news!
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scifilover
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Re: Grandparent with 529 plans

Post by scifilover »

If your children are very successful, the issue of FAFSA for grandchildren is not really material. They won't qualify for any need based assistance. We established 529 plans for our grandchildren. They are both going to state universities in the mid-west, and the 529s have enough funds to pay for the costs of attending. Their parents still have to pay for travel costs, clothing, incidentals, and fun. We wanted our grandchildren to graduate without undergraduate college loan debts. And, it is a great way to be more in the life of your grandchildren as they go through college.
oldfatguy
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Re: Grandparent with 529 plans

Post by oldfatguy »

JoeRetire wrote: Wed Mar 17, 2021 7:24 am
DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is great news!
Seems like this will create the potential for more aid going to students who don't really need it, and make it even easier for parents to game the financial aid system.

Not a good change, IMO.
DIFAR31
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Re: Grandparent with 529 plans

Post by DIFAR31 »

JoeRetire wrote: Wed Mar 17, 2021 7:24 am
DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is great news!
There are parts of this big change that everyone will love and hate.
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JoeRetire
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Re: Grandparent with 529 plans

Post by JoeRetire »

oldfatguy wrote: Wed Mar 17, 2021 11:11 am
JoeRetire wrote: Wed Mar 17, 2021 7:24 am
DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is great news!
Seems like this will create the potential for more aid going to students who don't really need it, and make it even easier for parents to game the financial aid system.

Not a good change, IMO.
At the same time it will be good for the students that do really need it. It will make my 529 contributions worth more for my grandchildren.
Sorry you don't like it.
Last edited by JoeRetire on Wed Mar 17, 2021 2:56 pm, edited 2 times in total.
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JoeRetire
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Re: Grandparent with 529 plans

Post by JoeRetire »

DIFAR31 wrote: Wed Mar 17, 2021 1:03 pm
JoeRetire wrote: Wed Mar 17, 2021 7:24 am
DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is great news!
There are parts of this big change that everyone will love and hate.
Seems like that's always the case.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
oldfatguy
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Re: Grandparent with 529 plans

Post by oldfatguy »

JoeRetire wrote: Wed Mar 17, 2021 2:53 pm
oldfatguy wrote: Wed Mar 17, 2021 11:11 am
JoeRetire wrote: Wed Mar 17, 2021 7:24 am
DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is great news!
Seems like this will create the potential for more aid going to students who don't really need it, and make it even easier for parents to game the financial aid system.

Not a good change, IMO.
At the same time it will be good for the students that do really need it. It will make my 529 contributions worth more for my grandchildren.
Sorry you don't like it.
I would think that asking about all sources of income/assistance to pay for college would be a better way to assess student need than not asking about it.

Doesn't impact me, personally, though.
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JoeRetire
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Re: Grandparent with 529 plans

Post by JoeRetire »

oldfatguy wrote: Wed Mar 17, 2021 3:01 pm I would think that asking about all sources of income/assistance to pay for college would be a better way to assess student need than not asking about it.

Doesn't impact me, personally, though.
But of course the current FAFSA doesn't ask about all sources of income/assistance, just a select few.

Glad it doesn't impact you. Glad it will be beneficial to my grandchildren. Given what's happening with college costs these days, they are going to need it.

(This isn't at all the way I would design the higher education system in our country if I were appointed king, but we aren't supposed to speculate on future legislation here.)
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marathonwmn
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Re: Grandparent with 529 plans

Post by marathonwmn »

DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
Thank you for this information. I'm pleased to see that I will not hamper my grandchildren's ability to get financial aid by contributing to 529 Plans.
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marathonwmn
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Re: Grandparent with 529 plans

Post by marathonwmn »

dukeblue219 wrote: Tue Mar 16, 2021 8:05 pm
marathonwmn wrote: Tue Mar 16, 2021 7:23 pmI could change the beneficiary designations to my daughter who still has higher education loans and let her use the funds to reduce her loans. Up to $10,000.00 per year.
Double check this. I'm almost certain it's $10k lifetime. Not per year.
Thank you, I will double check.
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TheGreyingDuke
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Re: Grandparent with 529 plans

Post by TheGreyingDuke »

marathonwmn wrote: Tue Mar 16, 2021 7:23 pm

Simultaneously my daughter would open a 529 plan for each of the grandchildren. She would be the owner of the plans and I can fund them through the sale of EE bonds. The sale of the EE bonds will be tax free since the proceeds from the redemption were deposited to the 529 plans within 60 days of redemption.
If you want to use the tax-free funds from the maturing EE bonds, you (or a dependent or spouse) need to be the beneficiary of the 529. Once in there you can change the beneficiary to your grandchildren.

https://www.kiplinger.com/article/taxes ... ation.html
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Re: Grandparent with 529 plans

Post by RickBoglehead »

DIFAR31 wrote: Tue Mar 16, 2021 8:33 pm The FAFSA will be radically changed, beginning with the 2023-2024 academic year. One of the major changes is that FAFSA will no longer ask if grandparents have given a student money to help with college costs. If your 15 year old grandchild is a high school sophomore now, his/her first college year would take place during the first year that the revised FAFSA is used. There goes your problem.

https://www.thecollegesolution.com/new- ... nd-losers/
This is EXACTLY why we have our 529s still setup with ourselves as owners and our children (grown) as beneficiaries. Until we get closer to their children going to college and knowing what the rules will be then, we're not making the grandchildren beneficiaries or making the parents owners of the accounts. We have total flexibility now, and it's invisible to FAFSA - because the grandchildren aren't beneficiaries.
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Re: Grandparent with 529 plans

Post by cshell2 »

As was mentioned the new FAFSA rules will not count gift money, but even before that grandparent 529s could remain invisible to financial aid if used in the last two years of college due to the prior prior year lookback.
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