Is it better for a parent or a grandparent to own a 529 savings plan account?
529 plan accounts can be a great way to save up for college. Most commonly, parents or grandparents are the owners of a 529 savings plan account with the kids and grandkids as the beneficiaries. So, is it better for a parent or a grandparent to own a 529 plan account?
When students apply for financial aid, they have to fill out the Free Application for Federal Student Aid (FAFSA). One key element of this application is the Expected Family Contribution (EFC), which calculates the amount of money that your family is expected to chip in for your kid’s college expenses. If college expenses exceed the EFC, the student becomes eligible to apply to federal financial aid programs. EFC is calculated using students’ income and assets along with their parents’ income and assets and a certain amount of the EFC needs to be used before eligibility for financial aid kicks in.
30% of parents saving for their kid’s college in the United States use a 529 savings plan account.1 When a 529 savings plan account is owned by parents, it comes under their assets and the 529 savings plan account could affect financial aid. However, the percentage of parents’ assets that is counted toward the EFC calculations is capped at 5.64%.2 The impact of a parent-owned 529 savings plan account on financial aid can be minimal, depending on income.
In 2022, new changes to the FAFSA were introduced eliminating the need to disclose cash gifts from grandparents. Officially, the new simplified FAFSA goes live on October 1, 2023, for the 2024/2025 academic year. However, since FAFSA looks at income from two years prior, grandparent-owned 529s are no longer counted as part of the student’s income.
Grandparents who open a 529 account can also receive state tax benefits in over 30 states depending on their plan, which makes this appealing for both grandparents and grandchildren. One thing to keep in mind is that grandparent-owned 529 plans will still be considered on the CSS profile, which is an application used by about 300 educational institutions to award institutional aid.
If grandparents are keen to help set up a college fund but don’t want to own a 529 account themselves, they can also gift the amount to the child’s parents, who in turn can open a 529 savings plan account for the child. Contributions to a 529 savings plan account are considered gifts for tax purposes, and for 2023, contributions of up to $17,000 per individual—$34,000 per married couple filing jointly—qualify for the annual gift tax exclusion. For example, if a couple has three grandchildren, they can gift $102,000 in total tax free this year, when filing jointly toward their grandkids’ college education. These contributions don’t impinge on the taxpayer’s lifetime gift and estate tax exemption, which in 2023 is set at $12.92 million.
Talk to a financial professional
A financial professional can help you evaluate your options and come up with a plan that aligns with your needs.
1 College Savings Statistics, Education Data Initiative, December 2022. 2 FAFSA, 2021.
Important disclosures
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
Consult your financial, tax, or other professional to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. Some states do not consider 529 withdrawals for student loan repayments to be qualified withdrawals and, therefore, the investor may be subject to penalties. The $10,000 qualified education loan limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC.
John Hancock Retirement Plan Services, LLC offers administrative or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York), and John Hancock Life Insurance Company of New York, Valhalla, New York. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.