Grandparents, Gifting, and Getting an Education: Smart Tips for 529 Plans

Thousands of parents and grandparents have discovered the advantages of 529 plans for education funding. These tax-advantaged accounts, administered by the states, can provide much-needed funding for qualified educational expenses. And, since the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, 529 plans can also be used to pay tuition and other qualified expenses for private K–12 education, in addition to college.

Especially for grandparents who want to get the maximum benefit from their plans—both for their college students and themselves—there are some tips that can provide advantages, not just for the college-bound, but also for those who are concerned about gifting strategies, estate planning, and even current tax efficiency.

Versatility

Funds deposited in a 529 plan grow without taxation, and when funds are withdrawn for qualified educational purposes, those withdrawals are not considered taxable income to the recipient. Disbursements are typically made to the plan beneficiary (the student), but funds from a 529 plan can also be directed straight to the educational institution, for crediting to the student’s bill. It’s also important to understand the breadth of different types of expenses that full under the “qualified” rubric. Of course, tuition, supplies, fees, and textbook expenses would be covered, but other “extras,” like study-abroad programs, can also qualify. These special programs can provide fantastic opportunities for students to broaden their horizons while continuing to earn college credit. Such programs need to be eligible for credit toward degrees at the student’s institution, and the institution must be eligible to grant the credit according to US Department of Education guidelines.

Boost annual giving

Funds deposited in a 529 plan by parents or grandparents are considered to be gifts, thus reducing the size of your taxable estate. You can give up to $18,000 per person (in 2024) without having to report the gift for tax purposes. This $18,000 contribution amount also doesn’t count toward your lifetime exemption amount. If you need to transfer even more assets out of the estate, you can multiply your gift to a 529 plan by making up to five years of gifts without incurring the gift tax. The gift is made in a single year but is averaged over five years. This means you can contribute $18,000 five times (or $90,000) at one time in 2024. If you are married, your spouse could gift an additional $90,000, for a total contribution of $180,000 per beneficiary. (You’ll need to file IRS Form 709 to elect treatment of the entire gift as a series of five equal annual gifts). Because the use of the funds is limited to qualified educational purposes, gifting to a 529 plan also provides convenient “guardrails” that can ensure your gift is used for the purposes intended.

Control with flexibility

With most plans, the account owner has the right to name a successor. In fact, many plans allow you to name a primary and a secondary successor to take over in the event of your death, disability or voluntary resignation. If you do not name a successor, the rules of your specific college savings plan will determine what happens to the plan at the time of your death or disability. The plan’s provisions will determine the new owner, and the beneficiary will remain the same unless a change is made by the new owner. Here’s another benefit that provides some extra flexibility: you can change the beneficiary if the original beneficiary no longer needs the funds remaining in the plan. For example, if a 529 plan is paying for the education of an older sibling who graduates and no longer needs the help, the beneficiary can be changed to a younger sibling, who can then begin receiving disbursements from the plan as needed.

What about excess funds?

Some might be concerned about having money left over in a 529 plan, even after that last grandkid has finished college. Fortunately, this is another area where you have options. First, as already mentioned, excess funds can be reallocated to a younger sibling or cousin. Funds may also be left on deposit in the plan to cover the possibility of a grandchild who decides to return to grad school, enter law or medical school, or pursue some other professional program that requires more education. If a grandchild graduates with student loan balances outstanding, 529 funds may be used to pay up to $10,000 on a qualified education loan. Subject to certain requirements, excess 529 balances may also be rolled over to a Roth IRA owned by the plan beneficiary. To do this, the rollover amount is limited to the allowable annual contribution ($7,000 in 2024 for persons under age 50); rollovers cannot exceed a lifetime limit of $35,000 per beneficiary; and the plan must have been in force for the existing beneficiary for at least 15 years. As a last resort, the funds can always be withdrawn from the plan for non-qualified purposes, such as making a down payment on a first home or retiring debt. These distributions will be taxable as ordinary income, and there will also be a 10% penalty assessed. Depending on the tax bracket of the recipient, however, it may be worth it to take the hit and use the funds for a constructive purpose.

Grandparents who want to give their grandkids a “leg up” on education funding need to know all their options. They may also be concerned with estate planning matters, and at Aspen Wealth Management, we want to provide the answers they need. To learn more, visit our website to read our article, “Tips for the College-Bound and Their Parents: FAFSA Changes for 2024–25.”