Rule Change Allows Grandparents to Give More to College 529 Plans

Transcript of Podcast Episode 191

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, a new rule allows grandparents to give more to college 529 plans.

Section 529 plans, widely introduced in 1997, have long been a popular method for a grandparent to help fund a grandchild’s college expenses.

A Section 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs.  The primary advantage of 529 plans is that participants don’t have to pay federal (or sometimes state) taxes on gains or withdrawals if the money is used for college or certain other education expenses.  Also, since 2019, the funds can be used to help with student loan repayments.

The rules for 529 plans vary from state to state.  In 2022, state lifetime contribution limits range from around $235,000 to more than $550,000 per beneficiary, depending on the state.

When a grandparent sets up a 529 plan, they generally do so in their own name with a specific grandchild as the beneficiary.  If there is money left over in the account, the beneficiary designation can be changed to another family member without triggering any taxes.

But 529s can also have a negative impact when it comes to qualifying for financial aid.  This has to do with the Free Application for Federal Student Aid, or “FAFSA” form.  This is the form that approximately 65 percent of students and their families use when applying for financial aid.

Under the current rules, when a student accepts a distribution from a grandparent-owned 529 account, it effectively reduces the student’s eligibility for federal financial aid by 50 percent of the amount withdrawn. The mechanics are predictability complicated.  The current FAFSA form requires students report how much they receive from non-parent sources.  They then add half that amount to what’s known as the “Expected Family Contribution.” They then deduct that amount from the student’s overall federal aid eligibility.

As any parent with college –age children likely is aware, the FAFSA form is long and complicated, filled with questions about assets and income.  A surprising number of people never even finish the application process.  That’s gotten the attention of Congress, and last year they passed the FAFSA Simplification Act.

One of the provisions of the Act, which takes effect in 2024, may give grandparents more of an incentive to invest in Section 529 plans.  In an effort to simplify the form, students will no longer be asked about outside contributions.  In other words, grandparents will soon be able to contribute to 529 plans without penalizing their grandchild’s eligibility for federal aid.

This change is good news not just for grandparents, but for aunts, uncles and other non-parent family members.  The new rules allow these people to contribute as much as they want into their 529 accounts without the student being required to report any funds that are later withdrawn.

Wealthy families are often either ineligible for financial aid or just don’t bother to apply.  But the simplified FAFSA is good news for low- and middle-income students. A study earlier this year by the National College Attainment Network estimated that $3.75 billion in aid was left on the table because students and their families did not complete the FAFSA form.

529s are just one potential tool in your financial arsenal.  Your Security Mutual Life Insurance Advisor can help you get the process started.  Your advisor will assemble your team and coordinate with your attorney and tax professional to review your situation and to determine the financial plan that will yield the results you want and intend. 

This podcast is brought to you by Security Mutual Life Insurance Company of New York, The Company That Cares®.  The content provided is intended for educational and informational purposes only.  Information is provided in good faith.  However, the company makes no representation or warranty of any kind regarding the accuracy, reliability, or completeness of the information. 

 The information presented is designed to provide general information regarding the subject matter covered.  It is not to serve at legal, tax or other financial advice related to individual situations, because each person’s legal, tax and financial situation is different.  Specific advice needs to be tailored to your situation.  Therefore, please consult with your own attorney, tax professional and/or other advisors regarding your specific situation

 To help reach your goals, you need a skilled professional by your side.  Contact your local Security Mutual life insurance advisor today.  As part of the planning process, he or she will coordinate with your other advisors as needed to help you achieve your financial goals and objectives.  For more information, visit us at SMLNY.com/SMLPodcast.  If you’ve enjoyed this podcast, tell your friends about it.  And be sure to give us a five-star review.  And check us out on LinkedIn, YouTube and Twitter.  Thanks for listening, and we’ll talk to you next time.

 The applicability of any strategy discussed is dependent upon the particular facts and circumstances.  Results may vary, and products and services discussed may not appropriate for all situations.  Each person’s needs, objectives and financial circumstances are different, and must be reviewed and analyzed independently.  We encourage individuals to seek personalized advice from a qualified Security Mutual life insurance advisor regarding their personal needs, objectives, and financial circumstances.  Insurance products are issued by Security Mutual Life Insurance Company of New York, Binghamton, New York.  Product availability and features may vary by state.