Saving for your child or grandchild's education is an investment in their future. One excellent tool to consider is a 529 account, which offers tax advantages and flexibility. Whether you're a parent or grandparent, understanding the process of opening and funding a 529 account is crucial.
In this article, we will explore the steps involved in setting up a 529 account, discuss key considerations for both parent-owned and grandparent-owned accounts, and highlight the benefits they provide.
Opening and Funding a Parent-Owned 529 Account
To open a parent-owned 529 account, follow these steps:
- Research and Select a Plan: Start by researching different 529 plans available in your state or any other state offering favorable benefits. Consider factors such as investment options, fees, and performance history.
- Choose the Beneficiary: Select the child for whom you are saving as the account beneficiary. Remember, you can change the beneficiary to another eligible family member if needed.
- Determine Contribution Amount: Determine how much you can comfortably contribute to the 529 account. Remember, even small contributions can make a significant impact over time.
- Fund the Account: Once the account is open, begin funding it. You can contribute regularly or make one-time lump sum payments, depending on your preference and financial situation. One strategy worth considering for both parent-owned and grandparent-owned 529 accounts is front-loading, which involves making a larger lump sum contribution early on. Front-loading can be advantageous because the earnings in the account have more time to grow, potentially resulting in higher balances when it's time to pay for college expenses. However, it's important to be mindful of the gift tax implications and consider consulting with a financial advisor or tax professional to fully understand the impact and benefits of front-loading a 529 account.
Opening and Funding a Grandparent-Owned 529 Account
When grandparents wish to open and fund a 529 account, they should keep the following considerations in mind:
- Ownership and Impact on Financial Aid: Grandparent-owned 529 accounts may affect a student's eligibility for need-based financial aid differently than parent-owned accounts. Since the Free Application for Federal Student Aid (FAFSA) considers parental assets more heavily, grandparent-owned accounts might have less impact on financial aid.
- Timing of Distributions: To minimize the impact on financial aid, consider waiting until the student's junior or senior year of college before withdrawing funds from a grandparent-owned 529 account. Distributions taken after the FAFSA has been filed for the student's final undergraduate year will not be counted as income on the FAFSA.
- Gifting and Contributing: Grandparents can gift up to the annual exclusion limit without incurring gift tax. Additionally, they can make a lump sum contribution of up to $75,000 per beneficiary (or $150,000 for married couples) without triggering gift taxes, as long as they file a gift tax return and make no additional gifts to the same beneficiary within five years.
New 529 Rollover Opportunities
The new 529-to-Roth transfer rule aims to make 529 plans more appealing by easing fears of unexpected taxes and encouraging early investment for tax-free college savings growth. However, the rule comes with certain restrictions to prevent misuse of these savings plans for wealth transfer, and to ensure they're used primarily for educational funding. These restrictions include a lifetime transfer cap of $35,000 per beneficiary, a requirement that the 529 account is at least 15 years old, and a prohibition on transferring contributions or their earnings from the last five years. While transfers must adhere to annual Roth IRA contribution limits, there's no income limit.
Opening and funding a 529 account is a valuable way to save for a child or grandchild's education, providing tax advantages and flexibility. It is not only an investment in their future but also a means of transferring wealth to the next generation in a meaningful and tax-efficient way. By leveraging the benefits of parent-owned and grandparent-owned accounts, families can navigate the complexities of financial aid considerations and maximize their savings. By taking proactive steps to plan for education expenses, parents and grandparents can secure a brighter future for their loved ones while optimizing their overall wealth transfer strategy.
To learn how our financial advisors can help you navigate opening your own my529 account, schedule a call today.
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