How Grandparents Can Help With the Cost of College
By Tom McDavitt
With the cost of education continuing to escalate, many grandparents are looking to help. Baby boomers are more likely than prior generations to get involved as they are amongst the first to have experienced college as an expected part of life. Some of the most common methods available include setting up 529 Savings Plans, outright cash gifts, and direct payment to the college.
Direct tuition payments are not considered gifts under federal law regardless of the amounts paid. The $13,000 gift limit (or $26,000 if a joint gift) is avoided using that strategy as long as the funds cover tuition only. Room and board, fees, books and equipment are not exempt from the limit. Many people like this option because they control the dollars and therefore are assured that they end up paying for school as they intended. You can still make the annual gift on top of that if you want to. One caveat is the fact that any financial aid award is normally directly reduced by the payment. You should always call the college involved to inquire if such negative implications are imposed.
Outright gifts are another popular method of contributing. You are normally limited to the $13,000 limit (or $26,000 for a couple) without worrying about gift tax issues. Again, many schools will reduce financial aid as a result of the payment. One strategy that helps alleviate that issue is to gift the cash to the parents instead as that has far less impact on financial aid packages.
In a 529 plan, contributions can be made when the child is much younger and the growth is tax-deferred and withdrawals are tax free if they used to pay college costs ~ including tuition, room and board, fees and some equipment. The most popular 529 plans are invest-type accounts that are sponsored by most states and managed by financial institutions. In Massachusetts, there are no upfront tax benefits to speak of, but some states offer meaningful tax benefits on deposits. You should check with your state’s plan to see if there are reasons to look first at that option. However, you are not compelled to invest in your own state’s plan! I live in Massachusetts and my plans are sponsored by Virginia. You receive the same tax advantages whether you use the MA plan or any other state’s.
Grandparents can open a 529 plan and name a grandchild as the plan’s beneficiary. Please be aware that you do not have to die for the beneficiary to be paid; you control the payouts during your lifetime. Special rules for 529 plans allow you to deposit five years of gifts right away. In other words, you could put as much as $130,000 (joint gift) into the account in year 1 without any gift tax implications. As an added benefit, those assets are considered removed from your estate after 5 years, avoiding estate taxes should you pass away and have a taxable estate.
A 529 plan is considered a parental asset for financial aid purposes. As a result, the reduction in aid is impacted only modestly versus the prior options discussed above. You should consult with a financial advisor before investing in a plan to make certain that it is the best option in your individual circumstances.
Tom McDavitt, located at 102 Shore Dr. Suite 400, Worcester, MA 01605, is a Registered Representative and Investment Adviser Representative with/and offers Securities and Advisory Services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that a college-funding goal will be met. In order to be federally tax-free, earnings must be used to pay for qualified higher education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10-percent penalty. By investing in a plan outside your state of residence, you many lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administrative/management fees and expenses.
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