CONTRIBUTORS
Bill Cass, CFP®, CPWA®
Director of Wealth Planning,
Franklin Templeton
So your grandchild has college in their future. When deciding how to support their education goals, consider a 529 plan, which offers benefits to grandparents as well as the student. Here are some reasons why grandparents may want to consider funding a 529 plan.
Control over assets
A grandparent can choose to fund and remain the owner of a 529 to benefit a grandchild. If they do, they retain control over the account. That means if they need access to the funds for some reason, they can make a non-qualified distribution. This may provide some peace of mind for grandparents who are concerned about making gifts and losing control over those assets. However, the non- qualified distribution would be subject to reporting the earnings portion as income on their tax return and also be subject to a 10% penalty on the earnings portion.
Advantages for estate planning
At the same time, there are some tax advantages for grandparents funding a 529 plan.
- Funding 529 plans provided an option for removing assets out of an estate. This may be appropriate for grandparents who are reaching a time where they are interested in reducing the size of their estate
- In addition, the unique provision which allows 5 years’ worth of gifts to be contributed all at once up-front can transfer significant assets out of an estate, especially if there are multiple grandchildren*
Consider this example of two grandparents front-loading gifts to five grandchildren.
*It is important to note that if the grandparent passes away during the 5-year period following the front-loaded gift, then a pro-rata portion of those assets will revert back to the deceased grandparent's estate.
New changes: A grandparent-owned 529 will not diminish federal aid
When completing the Free Application for Federal Student Aid (FAFSA) a 529 owned by a grandparent is not considered as an asset for purposes of calculating financial aid
- 20% of student assets are considered as part of the calculation and up to 5.6% of certain parent assets are taken into account
- Currently, savings in 529 plans owned by grandparents (and other non-parents) are not reported as assets when completing the FAFSA†
Additionally, due to recent changes in the federal financial aid application, distributions from grandparent-owned 529 accounts are not considered as income to the student as part of the FAFSA income test for determining aid. Prior to this change, distributions from a grandparent-owned 529 could significantly reduce eligibility of aid on a subsequent FAFSA application.
†Certain colleges require that the CSS-Profile be completed when applying for financial aid. Depending on the institution, different rules may apply with respect to reporting assets, including 529 accounts owned by grandparents for example, as part of the filing. See cssprofile.collegeboard.org/ for more information.
Helping grandchildren jump-start retirement savings
Beginning this year, a new provision from SECURE 2.0 allows the transfer of 529 funds to a Roth IRA if certain conditions are met. See our post “SECURE 2.0 creates new backdoor Roth opportunity.”
- Consider a grandparent who funds a 529 shortly after the birth of a grandchild
- Once at least 15 years have passed and the grandchild has some earned income from a summer job, for example, funds could be transferred from the 529 plan to a Roth IRA in the name of the grandchild. This can help them get a start on saving for retirement.
- Note that some states may not conform to federal law for state income tax purposes for recognizing this provision allowing 529 funds to be transferred to a Roth IRA. Consult with a tax professional for more information.
Seek advice
As with any shifts in estate planning, it is important to consult with a financial professional who is familiar with your individual financial situation. There may be factors which grandparents should consider before choosing to be the owner of a 529 for grandchildren. For example, assets held in 529 plans would generally be considered pursuing Medicaid eligibility. Or, for grandparents who want to preserve their annual gift for other assets, making direct tuition payments to the institution may be a better option. These direct payments are not considered a completed gift for federal gift tax purposes.
Explore Franklin Templeton’s resources and learn how a Franklin Templeton 529 plan can help you invest for your child's education.
For more information, speak with your financial professional.
WHAT ARE THE RISKS?
All investments involve risk including possible loss of principal. Diversification does not guarantee a profit or protect against a loss.
Investors should carefully consider the 529 plan’s investment goals, risks, charges and expenses before investing. To obtain the Program Description, which contains this and other information, talk to your financial professional or call Franklin Distributors, LLC, the manager and underwriter for the 529 plan at (800) DIAL BEN/342-5236 or visit franklintempleton.com. You should read the Program Description carefully before investing and consider whether your, or the beneficiary’s, home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in its qualified tuition program.
Franklin Templeton’s 529 College Savings Plan is offered and administered by the New Jersey Higher Education Student Assistance Authority (HESAA); managed and distributed by Franklin Distributors, LLC, an affiliate of Franklin Resources, Inc., which operates as Franklin Templeton.
Investments in Franklin Templeton’s 529 College Savings Plan are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of New Jersey, Franklin Templeton, or its affiliates and are subject to risks, including loss of principal amount invested. Investing in the plan does not guarantee admission to any particular primary, secondary school or college, or sufficient funds for primary, secondary school or college.
Franklin Templeton, its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax professional.
This material has been provided for informational purposes only and should not be construed as investment advice or a recommendation of any particular investment product, or strategy.