One of the perks of being a grandparent is seeing your efforts for financial security pay off for the next generation. Grandparents can now take advantage of new options in the 529 plans offered by their state, allowing them to help set their grandchild up for future success with a reserve of money for their college education.
What is the 529 grandparent loophole and how does it impact your grandchildren when it comes to funding their higher education?
Here is what you need to know to take full advantage of the perks of opening a 529 plan for your grandkids today.
What is the 529 Grandparent Loophole?
Setting your grandchild up for future financial success often starts with ensuring they get the college education required for a long and satisfying career. Unfortunately, your contributions as a grandparent may have negatively affected how your grandchild qualified for financial aid on their FAFSA in prior years.
They would have had to claim a grandparent-owned 529 plan as untaxed student income, but this has changed with the 2023-2024 school year. With the new criteria, grandparents can make their contributions stretch even further because they will no longer be reported by the student. This is what is now known as the 529 grandparent loophole.
If you know that your grandchild will likely qualify for financial aid, it can be more beneficial to set up a 529 plan over other types of college savings vehicles.
Without having to claim a sizable savings account on the FAFSA, students can benefit from dipping into this 529 plan as well as making good use of the benefit of income-based financial aid and need-based scholarships.
This sets them up for a brighter future without being saddled with as much student loan debt, which is becoming more of a burden with each passing academic year.
Benefits of a 529 Plan
Do you want to help your grandchild make the most of a college education while maximizing your giving? The good news is that 529 plans have some of the best financial benefits around for both you and your grandchild, especially with the new loophole.
Tax benefits are the reason most people turn to this option for college savings. The money you contribute to the plan grows tax-free until it is time to spend it on higher education. After your grandchild enters college, distributions drawn from the plan are also tax-free when used for education expenses, allowing money to stretch even further.
In other words, a 529 college savings plan is a tax-deferred account that comes with the bells and whistles of faster financial growth to support a grandchild as they step into their future. You can even minimize your tax liability with 529 plans. Some states may allow you to make contributions on a tax-deductible basis as well as grow tax-free and withdraw tax-free for educational purposes.
Not to mention, you have some security in the event that your grandchild opts not to use the full 529 plan. Under the SECURE Act 2.0, you can now convert a 529 plan to a Roth IRA when the fund would be better spent apart from educational expenses.
This ensures that you can set up your grandchild for a successful financial future, even if they earn scholarships or attend a local community college that is not as expensive as what you may have planned for in your contributions. The money does not go to waste, though you could choose to roll it over to another beneficiary.
Opening a Trust for Grandkids
Of course, a 529 plan may not be the right fit for every family. If you are unsure about contributing to a grandchild’s education because you think they may not need it or even want to attend college, then you may consider setting up a trust for them.
A trust is another way to support a grandchild financially and set them up for future success if you find that a 529 plan is not the right fit for your specific situation or portfolio.
In particular, you may want to consider a charitable remainder trust (CRT) for your financial legacy. With this type of trust, you can name your grandchild as the beneficiary and allow them to receive the distributions throughout their lifetime (or for a set period). This allows you to watch them enjoy financial security while you support them through their college years and beyond.
One of the benefits of CRTs is that grandchildren will not have to pay estate taxes on the money included in this type of irrevocable trust and you get to donate to the charity of your choosing. A charitable remainder trust is a winning situation for all involved: you, your grandchild, and your charities.
Chart Your Grandchild’s Course with Magellan
Magellan allows you to take full advantage of the financial benefits and tax implications for future generations. We serve as your one-stop shop for all financial, legal, tax, and estate planning needs. Whether you are thinking of setting up a trust or making use of the grandparent loophole for 529 plans, we can review your portfolio and help you find the perfect solution.
Contact us today to learn more about how we can assist with a financial plan that secures your lifestyle in retirement while supporting your grandchildren!
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.