FAFSA update: Why Grandparents Now Have Greater Incentive to Own 529 Accounts
Big changes to the FAFSA process mean grandparents can finally help pay for college without worrying about the “financial-aid trap.” Columbia Threadneedle Investments Because of pending changes to the Free Application for Federal Student Aid (FAFSA), students will no longer have to disclose cash support. That means effective for the 2023-2024 school year, grandparent-owned 529 accounts will no longer impact a student’s eligibility to receive needs-based financial aid.
Say goodbye to the financial-aid trap 529 plans are generally considered the most effective way to save for education-related expenses. But in the past, treatment of grandparent-owned accounts had been criticized and even garnered the term financial-aid trap from savingforcollege.com. Why? Because while families applying for aid aren’t required to disclose grandparent-owned 529 account assets on the FAFSA, they are required to disclose any cash support the student receives. So, if distributions are taken from grandparent-owned accounts and used for education expenses, the student is expected to show the distribution as income on future FAFSA applications.
What Makes 529 Plans Attractive for Grandparents
Even before this change was announced, 529 plans offered grandparents several advantages, including exclusive gifting and estate planning benefits. After all, many grandparents are either in their peak earning years or already retired. They’re 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, but 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.
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