Rule Change on Grandparents Giving to 529 Plans

Gail Maidenbaum

Gail Maidenbaum, MBA August 29th, 2022

Gifting to grandchildren’s 529 Plan is a wonderful way to make a meaningful and tax-advantaged contribution to a grandchild’s education. Remember that funds in a 529 plan can be used for qualified expenses for a post high school eligible institution, or up to $10,000 per year may be used for private school tuition for grades K-12.

The Free Application for Federal Student Aid (FAFSA) will no longer ask about amounts provided by non-parents, so a distribution from a 529 owned by a grandparent will not count as student income. This rule takes effect in the 2024-2025 school year.

How a 529 Plan Works

Money invested in a 529 Plan grows tax-deferred, and the distributions are tax-free when used for qualified expenses. Qualified higher education expenses include costs for enrollment or attendance at a college, university, or other eligible post-secondary institution. It also includes up to $10,000 per year in tuition for K-12 students and up to $10,000 in student loan repayments.

Common qualified expenses:

  • Tuition and fees
  • Books and supplies (for college)
  • Computers, software, and internet access (for college)
  • Room and Board –with limitations on eligibility and amount
  • Special needs equipment (for college)

Every state offers a 529 plan. There may be tax advantages to enrolling in the plan in your state, but there may be valid reasons to enroll in a different state’s plan.

Planning Ideas for UTMA or UGMA Accounts

Uniform Transfer to Minors Act (UTMA) and Uniform Gift to Minors Act (UGMA) accounts belong to the child at the age of majority. In addition, when those accounts make distributions, the gains in the account are taxed.UTMA and UGMA accounts may be transferred into 529 Plans as long as certain rules are followed. Please note, assets in a UTMA/UGMA do count as student assets for FAFSA.

Caution: There are many rules to follow with respect to 529 Plans that are not included in this summary. Please contact your wealth advisor before enrolling in a 529 Plan or transferring UTMA/UGMA assets.

Sources:

  • Carpenter, Scott.”Grandparents Can Give More to College 529 Plans Under Congress Rule Change.”Bloomberg, Bloomberg L.P., 27 May 2022, https://www.bloomberg.com/news/articles/2022-05-27/grandparents-can-give-more-to-college-529-plans-under-congress-rule-change
  • Kortiak Mert, Martha.”Qualified Education Expenses -What You Can Pay for with a 529.”Saving for College, Saving for College, LLC, 26 July 2022, https://www.savingforcollege.com/article/what-you-can-pay-for-with-a-529-plan.

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Concord Wealth Partners, an SEC Registered Investment Advisor.

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