Common Mistakes With Grandparent Owned 529 Accounts

College Savings
Written By gbfadmin

529 Accounts

529 college savings accounts owned by the grandparents can be in a valuable benefit for a college bound grandchild.   Since the accounts are owned by the grandparents it does not show up anywhere for financial aid purposes which allows the student to qualify for more financial aid. However, even though 529 account owned by the grandparents are not considered an asset when applying for financial aid, distributions from 529 accounts on behalf of the beneficiary are considered income of the account beneficiary in the year that the disbursement occurs from 529 account.

For example, assume the grandchild receives $20,000 in financial aid in their freshman year but there is still a $10,000 balance due to attend college. The grandparents distribute $10,000 from the 529 account that they own for the benefit of the grandchild.  When the parents apply for the financial aid package in the student’s Junior year, they $10,000 529 disbursement that took place in the freshman year will need to be reports as income of the student on the FASFA application.  That could completely destroy their financial aid package since 50% of the student’s income counts against the financial aid package.

Remember, the FASFA application now looks back two years instead of one for income purposes.  To avoid this situation, the grandparents should not distribute any money from the grandchild’s 529 account until the spring semester of their sophomore year.

Don’t setup UGMA or UTMA accounts

UGMA a stands for Uniform Gift to Minors Act.  UTMA stands for Uniform Transfer to Minors Act.   Different names but the accounts work in a similar fashion.

If there is a chance that the student may qualify for financial support from either a public or private institution, these accounts can significantly reduce the financial award.  The types of accounts are considered an asset of the child not the grandparent.   When an asset is titled in the child’s name, approximately 20% of the account balance will count against their financial aid package.  For this reason, it is often more beneficial to establish a 529 account which is considered an asset of the grandparent and can be invisible for financial aid purposes.

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Related Posts
Biden's New SAVE Plan: Lower Student Loan Payments with Forgiveness
Biden's New SAVE Plan: Lower Student Loan Payments with Forgiveness

With student loan payments set to restart in October 2023, the Biden Administration recently announced a new student loan income-based repayment plan called the SAVE Plan. Not only is the SAVE plan going to significantly lower the required monthly payment for both undergraduate and graduate student loans but there is also a 10-year to 25-year forgiveness period built into the new program. While the new SAVE program is superior in many ways when compared to the current student loan repayment options, it will not be the right fit for everyone.

Big FAFSA Calculation & Application Changes Starting in 2023
Big FAFSA Calculation & Application Changes Starting in 2023

Parents that are used to completing the FAFSA application for their children are in for a few big surprises starting in 2023. Not only is the FAFSA application being completely revamped but the FAFSA calculation itself is being changed which could result in substantially lower financial aid awards for many college-bound students.

Top 10: Little-Known Facts About 529 College Savings Accounts
Top 10: Little-Known Facts About 529 College Savings Accounts

While 529 college savings accounts seem relatively straightforward, there are a number of little-known facts about these accounts that can be used for advanced wealth planning, tax strategy, and avoiding common pitfalls when taking distributions from these college savings accounts.

529 to Roth IRA Transfers: A New Backdoor Roth Contribution Strategy Is Born
529 to Roth IRA Transfers: A New Backdoor Roth Contribution Strategy Is Born

With the passing of the Secure Act 2.0, starting in 2024, owners of 529 accounts will now have the ability to transfer up to $35,000 from their 529 college savings account directly to a Roth IRA for the beneficiary of the account. While on the surface, this would just seem like a fantastic new option for parents that have money leftover in 529 accounts for their children, it is potentially much more than that. In creating this new rule, the IRS may have inadvertently opened up a new way for high-income earners to move up to $35,000 into a Roth IRA, creating a new “backdoor Roth IRA contribution” strategy for high-income earners and their family members.

Grandparent Owned 529 Accounts Just Got Better
Grandparent Owned 529 Accounts Just Got Better

A 529 account owned by a grandparent is often considered one of the most effective ways to save for college for a grandchild. But in 2023, the rules are changing………

College Savings Account Options
College Savings Account Options
Understanding FAFSA & How To Qualify For More College Financial Aid
Understanding FAFSA & How To Qualify For More College Financial Aid

As the cost of college continues to rise, so does the financial stress that it puts on families trying to determine the optimal solution to pay for college. It’s never been more important for parents and family members of these students

New York May Deviate From The New 529 Rules
New York May Deviate From The New 529 Rules

When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school,

Tax Reform: Changes To 529 Accounts & Coverdell IRA's
Tax Reform: Changes To 529 Accounts & Coverdell IRA's

Included in the new tab bill were some changes to the tax treatment of 529 accounts and Coverdell IRA's. Traditionally, if you used the balance in the 529 account to pay for a "qualified expense", the earnings portion of the account was tax and penalty free which is the largest benefit to using a 529 account as a savings vehicle for college.So what's the

Do I Make Too Much To Qualify For Financial Aid?
Do I Make Too Much To Qualify For Financial Aid?

If you have children that are college-bound at some point you will begin the painful process of calculating how much college will cost for both you and them. However, you might be less worried about the financial aspects of your child going to college after viewing some of the Bloomsburg student apartments for rent on the market at the moment.

Common Mistakes With Grandparent Owned 529 Accounts
Common Mistakes With Grandparent Owned 529 Accounts

529 college savings accounts owned by the grandparents can be in a valuable benefit for a college bound grandchild. Since the accounts are owned by the grandparents it does not show up anywhere for financial aid purposes which allows the student to qualify for more financial aid. However, even though 529 account owned by the grandparents are

5 Options For Money Left Over In College 529 Plans
5 Options For Money Left Over In College 529 Plans

If your child graduates from college and you are fortunate enough to still have a balance in their 529 college savings account, what are your options for the remaining balance? There are basically 5 options for the money left over in college 529 plans.

Tax Deductions For College Savings
Tax Deductions For College Savings

Did you know that if you are resident of New York State there are tax deductions waiting for you in the form of a college savings account? As a resident of NYS you are allowed to take a NYS tax deduction for contributions to a NYS 529 Plan up to $5,000 for a single filer or $10,000 for married filing joint. These limits are hard dollar thresholds so it

NY Free Tuition - Facts and Myths
NY Free Tuition - Facts and Myths

On April 9th New York State became the first state to adopt a free tuition program for public schools. The program was named the “Excelsior Scholarship” and it will take effect the 2017 – 2018 school year. It has left people with a lot of unanswered questions

Need to Know College Savings Strategies
Need to Know College Savings Strategies

Our newsletter this quarter is dedicated to helping families plan for what has become a life-altering cost of paying for college. But do not fear, there are simple things you can do to boost your children's college fund. It is not news to anyone that over the past 30 years, the cost of college tuition and room & board at all levels has spun out of control.

gbfadmin
Previous

Divorce: Make Sure You Address The College Savings Accounts
Next

M&A Activity: Make Sure You Address The Seller’s 401(k) Plan