If you want to provide educational opportunities for your children or grandchildren, you may want to consider investing in a 529 plan. In recent years, this plan has gotten more flexible, and potentially more powerful, than ever.
A key benefit of a 529 plan is that earnings are generally tax free, provided the money is used for qualified educational expenses. As the owner of the plan, you can essentially name any beneficiary you want, and you’re free to change the beneficiary as needed. Contribution limits are quite high, so you can put away considerable sums in a 529 plan – and you may want to, because college costs have risen steadily over the years. In fact, for the 2021-22 academic year, the College Board reports that the average cost (tuition, fees, room and board) of a public, four-year college or university is more than $27,000 for in-state students and nearly $56,000 for students at private schools.
But 529 plans are no longer just for higher education. Over the past few years, the rules governing 529 plans have changed, so they can now be used for:
• K-12 tuition expenses (up to $10,000 per student, per year),
• Apprenticeship programs registered with the U.S. Department of Labor, and
• Student loans ($10,000 lifetime limit for student loan repayments per each 529 plan beneficiary and another $10,000 for each of the beneficiary’s siblings.)
And soon, a major change will affect the relationship between grandparent-owned 529 plans and the financial aid packages awarded to their grandchildren. Families applying for aid have not been required to report grandparent-owned 529 account assets on the Free Application for Federal Student Aid (FAFSA). However, under previous rules, you had to report withdrawals from the grandparent-owned plans as untaxed student income, which could reduce aid eligibility by up to 50% of the amount of cash received.
But that’s changing for the 2024-25 FAFSA, which won’t require students to report cash support, including money taken from a grandparent-owned 529 plan. Instead, a student’s total income amount will be reported directly from federal income tax returns. This means that a grandparent-owned 529 plan won’t have any effect on need-based financial aid eligibility. This benefit to families is already here, because 2022 will be used as the base year for the 2024-25 FAFSA, so any withdrawals taken in 2022, and also going forward, won’t need to be reported as student income.
With this change, families will now have more options on using 529 plans without jeopardizing financial aid. You can generally withdraw any amount from the aggregate of all 529 plans for higher education costs, but only the qualified withdrawals – the ones used for typical education-related expenses – will be tax-free. The earnings portion of non-qualified withdrawals are taxable and could also incur a 10% penalty.
Given the new rules affecting a grandparent-owned 529 plan, you should consult with a financial professional to determine how this plan can work with other strategies to help meet educational expenses while, at the same time, not detracting from the progress you’d like to make on other important goals, such as a comfortable retirement.
In any case, consider looking into a 529 plan – it was already a great tool for education funding, and it can now offer your family even more options.
[Arnetta Tolley, Financial Advisor Edward Jones Investments 626-744-2740 or Arnetta.email@example.com.]