Navigating 529 Plans: Should Parents or Grandparents Own Them?
The decision on who should own a 529 plan for college savings is a common query among parents and grandparents alike. This article aims to provide clarity on the potential impacts of 529 plans owned by parents versus grandparents, based on the FAFSA and financial aid considerations.
Understanding 529 Plan Ownership: Impacts on FAFSA and Financial Aid
When considering who should own a 529 plan, it is crucial to understand its impact on the Free Application for Federal Student Aid (FAFSA) and subsequent financial aid distribution. Let’s break down the pros and cons of each scenario.
Parents Owning the 529 Plan:
The funds in a 529 plan owned by parents will show up on the FAFSA and have a slight impact on need-based aid, reducing it by approximately 5–6%. This is due to the asset being considered as a parent asset.
This option provides more control and flexibility in managing the funds, as parents are more likely to understand and manage the financial needs of the student.
Grandparents Owning the 529 Plan:
Grandparents owning the 529 plan can offer a smoother financial aid experience. While this option is complex, it involves a careful timing and strategy. Here are some key points:
Timing and Disbursement: If grandparents disburse the funds starting in April of the student's junior year, the money will not affect the student's financial aid award for the senior year. This is because the financial aid application for the senior year has already been submitted.
Tax Implications: Any individual can give up to $15,000 annually to anyone without it affecting their tax returns. So, two parents can give a total of $30,000 to one set of grandparents per year. This can be a useful strategy to build up the 529 plan without immediate tax consequences.
Usage: The grandparents can disburse the funds to the student starting in the junior year of college. The student can then use the money to cover the remaining costs after financial aid, and use any remaining funds to pay off student loans rapidly post-graduation. This strategy is governed by trust and careful planning.
Risk: Using a 529 plan owned by grandparents could pose risks. For example, if the grandparents are not reliable or if they encounter financial difficulties, the funds could be at risk. Therefore, it is crucial to ensure that the grandparents are trustworthy and responsible.
My Personal Advice: A Balanced Approach
Based on the complexities of both scenarios, my personal advice is to diversify the strategy and do both. Own a 529 plan in your name as a backup, and also consider having grandparents own a plan. This approach ensures that you have multiple funds available without relying entirely on one source.
Conclusion
The ownership of a 529 plan is a multifaceted decision that requires careful consideration of both the financial aid repercussions and the strategic timing of disbursements. By diversifying and combining both parent-owned and grandparent-owned 529 plans, families can optimize their college savings and financial aid strategies.