This Changes Everything - New 529 Guidance
Big changes to the FAFSA process mean grandparents and others can finally help pay for college for grandchildren and other students without worrying about the “financial-aid trap.”
529 plans have always been a powerful college savings tool and a smart vehicle for grandparents or others looking to take advantage of gift and estate tax benefits. Until now, even these highly regarded features combined with tax-free qualified distributions, haven’t always been powerful enough to overcome worries about potential impacts to financial aid.
Thankfully, effective immediately this is no longer a concern and grandparents or others considering investing in a 529 plan can now do so without fearing the financial-aid trap. Students will no longer have to disclose cash support on their Free Application for Federal Student Aid (FAFSA). This has huge financial planning implications.
Prior to this new rule, distribution taken from grandparent-owned accounts for education expenses were expected to be disclosed as distribution income on FAFSA applications.
As the table above shows, up to 50% of annual student income above the threshold can be deemed eligible for college use, which can have a big impact on needs-based aid eligibility. Meanwhile, parent-owned 529 plans, which are disclosed on the FAFSA, are only evaluated as up to 5.64% available for college use (no more than any other non-qualified asset).
As a result of the Consolidated Appropriations Act of 2021, all student income information will be taken from tax return data, using the IRS Data Retrieval Tool (DRT). So grandparents can finally contribute significantly to the cost of their grandchildren’s education without impacting any needs-based financial aid eligibility. Not only grandparents but anyone who wants to contribute to a loved one's education can now do so without impacting needs based eligibility.
What makes 529 plans attractive?
Even before this change was announced, 529 plans offered several advantages, including exclusive gifting and estate planning benefits. After all, many grandparents are either in their peak earning years or already retired. Grandparents are likely thinking about their financial legacy, putting them in a great position to enjoy all the benefits of 529 accounts.
Consider how 529 assets are treated in the Internal Revenue Code:
- Contributions to 529 plans are completed gifts and are removed from the contributor/owner’s taxable estate. The owner maintains control.
- Forward-gifting provision allows contributions in the amount of five times the annual exclusion—$75,000 for individuals ($150,000 for joint filers)—to be made in a single year without gift tax. This can be done for as many beneficiaries as the contributor desires.
- Access to tax-deferral with no time, age or income limits and with no required minimum distribution from 529 accounts for the owner or successor owner upon inheritance.
529 accounts also benefit grandparents because they’re incredibly flexible. For example, if the beneficiary decides not to attend college - the account owner can easily change the beneficiary at any time.
We encourage you to also visit savingforcollege.com for more information on 529s or contact us at 302.234.5655 with any questions. We are here to help!
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. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. Non-qualified withdrawals may result in federal income tax and a 10% federal tax penalty on earnings.