Being a grandparent can be one of the most rewarding roles anyone will play in their lifetime. Outside of the “fun” part of grandparenting, many also are looking for ways to help the next generation live a successful life. One way to do that is by helping your grandchildren pay for college. While there are many options available, one option you may not have considered is a grandparent-sponsored 529 education savings plan.
A 529 plan is a tax-advantaged savings account that can be used to pay for qualified educational expenses, such as tuition, fees, room and board, and books. And, since the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, students in private K-12 schools and academies are also benefiting from 529 funds to cover tuition and other qualified educational costs. Withdrawals from a 529 plan are tax-free if they are used for qualified expenses.
More than $398 billion has been put into 529 plans since 1996 by parents and grandparents to secure the next generation's opportunity to go to the college or other school of their choice. Utilizing 529 plans is a popular choice among individuals with high net worth as part of their estate planning strategy. This is because gifting assets through these plans allows them to grow tax-free. Withdrawing from the plan later is also possible without being taxed, so long as the money withdrawn is used to pay for qualified educational expenses only.
In addition to tax-efficient benefits, 529 plans also offer estate planning benefits. Contributions to a 529 plan are considered gifts for federal gift tax purposes. This means that grandparents can contribute up to $16,000 per year per beneficiary without incurring any federal gift taxes. For married couples, this amount doubles to $32,000 per year. Moreover, grandparents can elect to front-load five years' worth of gifts into a single year. This allows grandparents to contribute up to $80,000 per beneficiary in a single year without incurring any gift taxes (or $160,000 if both grandparents contribute).
The ability to change the beneficiary on a 529 plan is one of its best features since it allows for great flexibility when making gifts. For example, if the original plan beneficiary completes college without using all the funds in the account, then the owner can modify who receives those leftover funds. They could choose a younger sibling who would use that money to pay for private primary or secondary school expenses or costs associated with attending college themselves. The designated beneficiary of the plan can be swapped for any other family member. This could include, but is not limited to, the original beneficiaries' sibling, their parents, aunts, uncles, nieces, nephews, stepparents, and even first cousins.
529 plans do not include a time limit for use of funds, so the original beneficiary may go to graduate school later and still have access to the remaining money. In fact, with Millennials and Gen-Z generations changing jobs at a rate four times higher than their predecessors, 529 plans may become an essential source of funding for the periodic retraining that frequent career changes require.
If there is an unused balance in a 529 plan (which occurs around 10% of the time), what happens then? For example, if you gifted the account to a grandchild and they finished school with money remaining, or if there is no younger sibling or other relative to become the next beneficiary? If you take money out of a 529 account for any reason other than paying for qualified educational expenses, you will have to pay income tax on the portion of the account that consists of gains. In addition, there is typically a 10% penalty--just like if you were to withdraw money from an IRA before age 59 1/2.
There’s even more good news. On June 14, 2022, Senators Richard Burr and Bob Casey introduced the College Savings Recovery Act. This act would allow anyone who owns a 529 plan to roll over any unused balances into a Roth IRA. The College Savings Recovery Act, if enacted, could provide a tax-efficient way for families to transfer unused 529 balances to an individual retirement account (IRA), to give them "greater control over their savings." Doing so would prevent funds that were originally meant for future savings from being diverted into unnecessary tax expenses.
Triada Advisors is here to help you make smart, informed choices about education funding and other long-term financial goals. We understand that as a parent or grandparent, you want what is best for your family. And we are here to ensure that your hard-earned money goes where it needs to. Reach out to us today to start a discussion.