Grandparent or Parent Owned 529 – Secure Act 2.0

Many grandparents want to help their grandkids with college but don’t realize they could be accidentally harming their grandchild’s financial aid eligibility.

Today we discuss how properly structuring ownership of the 529 is so critical, and how to ensure your grandchild has the best opportunity to maximize their financial aid.

Grandparent or Parent Owned 529 – Secure Act 2.0


Full transcript:


Alex Okugawa & Anthony Saffer

Anthony Saffer 0:00
Many grandparents want to help their grandkids with college but don’t realize that they’re accidentally harming their financial aid eligibility. We’ll discuss how to properly structure ownership of the 529. And how to ensure that the opportunity to maximize financial aid for your grandchild is there.

Hey there it’s Anthony and Alex with One Degree Advisors, and we help you gain confidence in your retirement. So Alex with secure act 2.0, 529 college savings plans have gotten a boost. A lot of grandparents are talking about this idea of saving for their kid’s college. The reason it’s currently in the news is that there was this new law that says you can take college savings and basically converted over to a Roth IRA, for your grandkids. So you have a lot of people that are asking about this, not only for the college savings, but also for this Roth idea here.

Alex Okugawa 0:54
Yeah, and grandparents, rightfully so if they can, would like to help their grandkids with college. I mean, it’s gotten so expensive nowadays. And the thing is, in our conversations, with clients who are grandparents, I mean, they think they’re doing a great thing. In many ways they are, what they don’t realize, and what many families fail to realize is that there are actually unintended consequences of creating these 529 plans, if you’re not properly and strategically tiling, the ownership of the 529 plan.

Anthony Saffer 1:23
So let’s really get into the background of where this mess can evolve from.

Alex Okugawa 1:28
So again, when you go to college, you have to fill out that FAFSA form, a lot of people are familiar with that. And essentially what that does is FASFA determines your financial aid eligibility.

Anthony Saffer 1:39
So if there’s an owner on a 529 college savings plan, it can be the grandparent, it can be the parent, it can even be the child, and the taxes essentially workout the same way where if it’s put in there, and it’s used for qualified education, it can come out tax-free. The difference is with how financial aid works based on who the owner is.

Alex Okugawa 1:58
Speaking of ownership, I mean, let’s just give a brief example of what that ownership might look like. So let’s say you have a dad who’s going to be the owner of the 529 for their child. So it could be like, you know, the Joe Smith 529 for the benefit of Cassidy Smith, and Cassidy is the child. So again, that would just be an example of what that title ownership would look like.

Anthony Saffer 2:18
So let’s look at the three ownership examples go through if a grandparent owns the 529 college savings,

Alex Okugawa 2:24
So if a grandparent owns the 529 plan, you know, grandpa 529 for the benefit of child, the way that works is the value of the 529 plan is not considered an asset. When you’re filling out the FAFSA form. It’s a good thing. Exactly. In many ways, that is a good thing. The trouble though is that when you distribute funds from that 529 plan to the child, a grandparent on 529 plan to the child, the amount of income that they receive from that 529 is considered student income. And on the FAFSA form, student income is treated very harshly, more harshly than let’s say a parental asset. And so again, that’s an area where grandparents think they’re doing the right thing. They send money out to the grandkids, but it could have an unintended consequence when they later fill out FAFSA. But to find out what their financial aid could be.

Anthony Saffer 3:18
So how about a parent-owned 529? by a parent on 529?

Alex Okugawa 3:21
A parent plan, the value of that 529 I believe’s 5.64% of the value is counted against you on the FAFSA form for your expected family credit, aka how much money you get.

Anthony Saffer 3:35
Okay, how about student-owned?

Alex Okugawa 3:37
As long as the student is a dependent of the parent, it’s treated the same way as a parent-owned 529 plan. And the thing is, in all of this is important, remember that what FASFA does is they’re looking at two years prior income. So let’s say you’re going to school and 2023 through 2024, FAFSA is going to look at your 2021 income.

Anthony Saffer 3:56
Okay, so that is a really important point. So if you’re putting in a 529 college savings plan for your grandchildren, and you really want to use that 529 plan in the later years of college exactly shows up as income.

Alex Okugawa 4:10
Exactly. And Kitces has a great graphic that shows, honestly, how complicated and how complex this can be. And honestly, my hope the takeaway from this video for people to see is that you need to have a plan going into this. There are a lot of complexities. And it’s again, it’s a great idea to save for college, but you want to do so in a strategic way that will provide your grandchild with the most money while doing so that’ll also maintain their financial aid eligibility. So again, if you’re a grandparent and you want to maximize the money to your grandchild and not disrupt their financial aid eligibility as you mentioned, it could make sense to use it in the later years of college. So if they’re going to go to graduate school, we may want to use it in the later years of graduate school. But let’s say they’re not going to go to graduate school so there’s doing their undergrad. It could mean having since then to use a grandparent’s own 529 plan, maybe in their junior or senior year of college. And then maybe you have like a parent own 529 plan, you’d want to use that maybe in the freshman or the sophomore year of college. So again, strategically using these plans based on the ownership type can really make a difference to maximize financial aid eligibility.

Anthony Saffer 5:21
Okay, so a lot of grandparents do want to help their grandkids they don’t want to do it where they’re paying more tax than they need to. They don’t want to ruin financial aid. Helping in college is one way we talked about the 529 college savings plans. Another tip is you can pay tuition directly and that doesn’t count as a gift. It’s not taxable. We also posted a video recently on how to gift money to the next generation or two generations without paying taxes. We’re going to post that video up here. If you’d like to learn how we can help you gain confidence in your retirement including helping the next generation, visit our website at forward slash get started.

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