Parents and Grandparents: 6 Things You Probably Don’t Know About 529 Plans and Saving for College
How to fulfill your wish to send your kids (or grandkids) to college and bolster your estate planning in the process
By Kelly S. Olson Pedersen, CFP®, CDFA
The cost of college continues to cause sticker shock for many families. According to U.S. News, the average cost of tuition and fees for the 2020–2021 school year was $41,411 at private colleges, $11,171 for state residents at public colleges, and $26,809 for out-of-state students at state schools (in the “National Universities” category). 1
If you are like many parents and grandparents, chances are you are putting as much money as you can toward a 529 college savings plan. A 529 plan is a tax-advantaged savings plan designed to help pay for education. The money you contribute to a 529 plan grows tax-deferred, and withdrawals are tax-free if they’re used for qualified education expenses.
As popular as 529 plans have become, there are still a variety of features and uses of 529 plans that many parents and grandparents are unaware of. Below are six lesser-known aspects of 529 plans that can help you fulfill your wish to send your kids (or grandkids) to college, and bolster your estate planning in the process:
1. 529 plans are not just for college: Many families are unaware that you can use up to $10,000 per year of a 529 plan to pay for K-12 tuition, which can be a great solution for those with kids in private school. In other words, it can make a lot of sense to “overfund” your 529 plan beyond what your child will need for college if you have K-12 private tuition bills.
2. You can fund more than just tuition, fees, books and supplies. 529 plan funds can also be used to pay for expenses for off-campus housing, as long as that cost is not more than what the college would have charged to live on campus. So if the dorms would have cost $5,000 a year, for example, you can use up to $5,000 of your 529 funds to pay for off-campus housing.
3. The 529 plan is a great estate planning tool. Many individuals and couples don’t know that they can contribute to a 529 plan their full gift tax exclusion, which is $15,000 per person ($30,000 for a married couple) per year and not have to file a gift tax return. This is a great solution to reduce your potential estate without eating into your federal lifetime estate and gift tax exemption amount.
4. Coming soon: grandparent 529 plan distributions will not count as income on federal financial aid applications. Because of new rules introduced this year, families soon will not have to worry about taking distributions from grandparents’ contributions to 529 plans, as those distributions will no longer be reflected as income on a child’s FAFSA (Free Application for Federal Student Aid) application. The new simplified FAFSA application will not consider grandparent 529 Plan distributions as income once it goes into effect, which could happen as soon as next year.
5. Front load 5 years of gifting. A 529 plan can be a great tool for estate planning because of the ability to front load five years of gifting (up to $150,000) to a beneficiary (assuming no other gifts are made during the ensuing five years to that child). Those funds are then fully removed from one’s estate and do not count against the federal life time estate and gift tax exemption – a powerful estate planning tool!
6. Accessing your money if things don’t go according to plan. For all your diligent saving into a 529 plan, what if your child gets a full-ride scholarship, or what if he or she chooses not to go to college? Don’t worry. You (and your money) are not trapped. There are easy exits that are not overly costly. First, you can switch a 529 beneficiary to another child or another relative … or even yourself! Or if you choose to withdraw the funds, the 10 percent penalty is only on the earnings, not what you contributed, so the overall financial impact is minimal.