According to a 2014 Fidelity Investments study, nearly half
of grandparents expect to contribute to their grandkids' college savings, with
more than a third expecting to give $50,000 or more. That generosity can also
be channeled toward significant tax and estate planning benefits for the
grandparents. Financial advisers who can show them how to make those
contributions and reap financial advantages for themselves can shine.
Enter the 529 plan, a college savings investment account
that provides tax-free growth as long as the money is put toward tuition and
most types of college expenses such as fees and books. In addition, grandparents
can use 529 accounts to reap tax deductions or reduce the value of their
Furthermore, 529 plans have limits that might be comforting
for grandparents who worry that their grandchildren might spend the money
frivolously, or that they might end up needing it themselves. Grandchildren
must use the funds only for certain college expenses, such as tuition and
books. What's more, grandparents can keep the money if they need it, subject to
penalties and taxes.
One way to showcase 529 accounts to clients is by
highlighting their advantages over other savings strategies. For example,
grandchildren who receive Series EE bonds as birthday gifts can later
be socked with federal income taxes on the interest if they don't use the funds
for college. A 529 plan, in contrast, provides for tax-free distributions for
college. It also allows grandparents to give the funds to another grandchild if
the intended recipient does not go to college or need the money.
Grandparents may also be eligible for state income tax
deductions when they make 529 contributions - they are available in 34 states
and the District of Columbia. They can also take required minimum distributions
from their IRA accounts and transfer those funds to the 529 plan, where they
can continue to grow tax-deferred.
A 529 plan is also a unique way for grandparents to reduce
the value of their estates: they can contribute up to five years' worth of
allowable gifts in one year without triggering federal gift taxes. That means
clients filing jointly can invest $140,000 in one lump sum per grandchild.
One caveat: 529 accounts could make a grandchild ineligible
for financial aid because the money once withdrawn for the beneficiary counts
as income that schools use to determine financial aid awards. But grandparents
can avoid the problem by waiting until the recipient's junior or senior year to
hand over the money, when students may not need as much aid.
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